It is rare for a small business to have accurate and timely financial information. If you own a small business, you may say, “What does that even mean”? I have had many owners tell me that they measure their company’s financial performance by the money they have in their bank accounts. And if it is growing, they are good. Others watch revenues. If sales are up, we are doing well.
At best, these metrics provide minimal information.
And although an owner may minimize the need for a bunch of financial information, we all care about finances. The financial health of our company is usually a key driver of our stress.
Common Misunderstandings About Financial Data
In any given week, I hear comments like:
“The CPA says that the information is okay.”
It may be okay for tax purposes. The government will get its due, but we can’t make any operational decisions with the information.
“Cash is down in our bank accounts. Are we all right?”
In this case, the organization was right on budget, and all was going according to plan.
“I can’t give these financials to the bank for a loan because they can’t be right.”
The accountant had not used accurate accounting principles, so the owner didn’t have the information that a bank requires to underwrite a loan, even though he intuitively knew he was okay financially.
“We are doing great; sales are up compared to last year, and we add new accounts monthly.”
Yet, when you look at accounts receivable, most of the A/R is past due, with a considerable amount over 90 days. If you don’t get paid, the sales don’t matter.
“I know everyone says we are doing fine and growing, but our bank account isn’t growing. Where is the money?”
They were investing the cash flow back into the company in equipment and people to increase their capacity to support the ongoing growth.
Accurate Financial Data Tell the Real Story
Whether the concern or feeling is that things are bad or good, accurate and timely financial information tells the real story. If we follow consistent GAAP accounting, we can know the financial health of our company. If the information is timely and accurate, bankers and consultants can also get the same story from the data.
In the ever-evolving landscape of business, decision-making plays a pivotal role in determining the success or failure of an organization. While intuition and experience are valuable assets, relying solely on them can lead to costly mistakes.
One of the most critical components of effective decision-making is having access to accurate financial data.
How Does Accurate and Timely Financial Data Help
1. Assessing Performance and Identifying Trends
Accurate financial data allows us to assess all aspects of our financial health. What products or services are most profitable? Based on our growth and how fast we collect our money from customers, will we have enough cash flow to pay our people and vendors timely? Should we buy a higher quantity of a critical supply used in our business since we can get a better price?
To make these decisions, you need to know more than if you currently have money in the bank. You need information from your balance sheet and income statement to calculate inventory turns and days sales outstanding on your accounts receivable. Basically, these mean how fast you use or sell inventory and how fast you collect your accounts receivable.
2. Budgeting and Forecasting for the Future
Sound financial decision-making relies heavily on accurate budgeting and forecasting. By utilizing accurate financial data, you can develop realistic budgets and forecasts that reflect your business’s financial situation. It enables you to estimate revenue streams, project expenses, and predict future financial outcomes more precisely. With this information, you can allocate resources effectively, plan for contingencies, and make strategic decisions to drive growth.
3. Evaluating Investment Opportunities
Whether you’re considering expanding your operations, acquiring a new business, or investing in research and development, having precise financial information is crucial. It enables you to conduct thorough cost-benefit analyses, assess the return on investment, and calculate the payback period accurately. Armed with accurate financial data, you can make informed decisions regarding capital allocation, mitigating the risks associated with investment decisions.
4. Managing Financial Risk with Accurate Financial Data
Inflation kicked into the economy recently, and the government aggressively increased interest rates. The change in the economy changed things for many businesses. Businesses that do not have good financial data have significantly more worry, even if everything is okay. Why? The reason is they don’t know for sure. Suppose you know that you have more than enough cash to cover your debt and several months’ expenses. In that case, you keep making decisions to move your business forward. If you have no idea if you are okay financially, you may start cutting back from fear of the unknown and create a self-fulfilling prophecy of stagnating your business.
Even worse, you may have received many customer deposits and draws on your line of credit, and because you have cash, buy a piece of equipment. However, suppose sales slow down due to the economy. In that case, you have used up your money that was supposed to be for business operations.
5. Managing Taxes
I have seen so many financial statements that don’t have accurate inventory or accounts receivable balances. Expenses that should be on your profit and loss statement get hidden in a balance sheet account. I have seen employee-funded expenses like the employee’s insurance cost or payroll taxes show up on the company’s expenses.
All of these things create an inaccurate view of profits. Profits are what we pay taxes on. Suppose we have a higher balance in inventory on our balance sheet than in reality. In that case, our profits are overstated, and we will pay more taxes. If we spent a lot of money in costs but didn’t pull it out of a work-in-progress account accurately, we could also overstate our profit and pay more taxes. If we show employee-funded expenses on our profit and loss statement, it reduces our profit, and we pay less tax than is owed. Paying too little taxes could result in audits and penalties from the IRS.
Accurate and Timely Financial Information is Essential
As you can see, having accurate and timely financial information is essential. It serves as a compass, guiding you through the complex economic landscape and allowing you to navigate with confidence. Accurate financial data empowers you to make intelligent decisions that drive the growth and success of your business.
Investing in a sound financial system, employing qualified professionals, and prioritizing accurate record-keeping are vital steps toward ensuring the availability of reliable financial data. Remember, accurate financial data is not just a tool but a strategic asset that can set your business apart and position it for long-term success.
It also can reduce stress and give you the tools and the confidence to navigate the future in good and bad economic times.