Savvy business owners know that keeping accurate records is crucial to success. Sure, it’s a legal requirement to have your ducks in a row come tax time, but the benefits of reliable business intel go far beyond that. Your financial statements serve as the invaluable megaphone for your business’s inner voice. They give you feedback on how you’re doing as a leader.
By staying on top of financial reports that reflect the real state of your business month after month, you will unlock valuable insights that support smart, data-backed decisions and direct your attention and resources to move you closer to your goals and your long-term vision.
The Best Decisions Are Informed Decisions
One common mistake many business owners make is assuming they can cruise along each month without worrying about accuracy, because their CPA will clean up their books at the end of the year. This can be a costly mistake.
Each day, week and month you make decisions that can make or break your profits and cash flow. When you decide on whether to invest in staff, equipment and marketing, you must know your costs to evaluate the potential pay-off from your options. Flawed data can steer you in the wrong direction. By the time year-end rolls around and your CPA fixes the data, you will be stuck with the ill-informed decisions you made along the way.
Messy accounting records can lead to serious financial problems. Most businesses will at some point need capital to grow. Inability to quickly produce accurate records can make it difficult to get funding. Potential lenders or investors are wary of investing in a business that doesn’t have a clear picture of its financial health.
The best in the business take responsibility for keeping their books accurate by communicating clear expectations to their talented, competent bookkeeping staff. They share appropriate levels of information with their teams, so they can identify problems and create plans to address them. They keep customer databases accurate so they can correlate selling and customer metrics with financial results.
Keep it Accurate. Review it Regularly.
So, what does it take to ensure business financial records are accurate and timely? Here are a few tips:
- Hire a good bookkeeper. Don’t try to do it yourself or force it onto an inexperienced family member.
- Conduct a monthly financial review. Establish a list of reports, charts or dashboard items to include in a regular monthly business review packet. Then communicate your expectation to receive all the items the same way by the 15th of the following month. Consistency breeds efficiency.
- Reconcile bank statements immediately. Separate this function from the person who writes and records the checks.
- Ask your outside CPA to review your processes and suggest ways to improve your internal controls. This helps to reduce errors and the potential for internal theft.
- Use the appropriate method of accounting for your type of business. Cash basis counts revenue when you deposit the check or collect the cash and expenses when you pay them. If you have a simple business model with no accounts receivable or little inventory, it might make sense for you to use cash basis.
With the accrual basis, you book revenue when you invoice your customer and count the expense when you incur the expense. The accrual method shows the most accurate snapshot of profit because it matches your sales to the actual expenses you incur to fulfil the sale. If you sell on account or carry significant amounts of inventory, the accrual method is a MUST.
What’s In a Monthly Financial Packet?
You’ll want quick access to information that enables you to zero in on your progress toward your business goals and priorities. Start with your basic financial statements. Be specific about how you want them.
- Profit and Loss (Income Statement) – Be intentional about what periods you choose to review. For example, you might want to see columns for your June financial packet that include results for the month of June, last June (prior year) January through June (year-to-date) and last year’s June year-to-date. Each period MUST include the dollar amounts AND a % of sales column so you can see how expenses change in relation to sales. That’s a lot of columns. It’s okay to have more than one P&L report. You should have another report that shows actual results compared to your budget so you can see when you are going off course.
- Balance Sheet – Ask for year-over-year balances (e.g., end of June this year compared to end of June last year). From this you can quickly spot how your financial condition is changing. Is debt going up or down? Are cash reserves accumulating or eroding? Is inventory or accounts receivable ballooning?
- A dashboard of KPIs (Key Performance Indicators) that measure your business priorities that include actual results compared to goals.
- Sales pipeline data
- Accounts receivable aging schedule – keep past due balances in check.
- Accounts payable aging schedule – to ensure you are paying within terms. And if your suppliers offer early payment discounts, monitor discounts lost.
- Inventory activity and balance summaries – to verify you’re not running low on fast turners or investing too much in merchandise with low profit potential.
- Job cost summaries to compare job estimates with actual costs
- Overtime reports – it’s easy to let overtime sneak up if you don’t monitor it.
- What else? Information resources that keep you and your team focused on your goals!
Most of us Have Room to Improve
By following these tips, business owners can have accurate records that support informed business decisions. Remember, your records are a lens into your business operations. Take responsibility for keeping them real and keeping them accurate! To assess whether you’re doing all you can to keep your books accurate, timely and insightful, download our “Tips for Better Books” checklist.
Tips for Better Books – the Podcast
Listen as Profit Soup founder, Barbara Nuss, shares her insights on Tips for Better Books on the Small Bites of Business Insights podcast, produced in conjunction with the Yum! Center for Global Franchise Excellence at the University of Louisville.
Want More Tools and Insights for Better Decisions?
Take your financial skills to the next level with Profit Soup Online’s dynamic and accessible financial training. With our contemporary, on-demand courses, you’ll learn how to make smart, data-driven decisions to take your business to new heights. Best of all, the first two courses are on us. Don’t miss out on this opportunity to transform the way you do business.