Let’s face it, for most of us accounting is not real high on our list of fun things to do. For some, it’s like going to the dentist; you’d rather be anywhere else. But for any business, especially a small one, it is very important that you get beyond your fear, and do it quick! When I conduct a productivity assessment of a business, I not only look at the financial reports, but also assess the validity of the numbers and how they are being used.
Your accounting system has a wealth of information which you should be looking at on a frequent basis. Software like QuickBooks™ has predefined reports ready for you to run, so you have no excuse. The system can tell you who owes you money. Or who may be calling you for money. At a quick glance you can see who your highest spending clients are, what they are buying, and when they buy during the month. You can assess if you need to shift efforts to unload old inventory or change your marketing to emphasize another service. You can see if you have a profit on a particular job or client. You can see if your business is making or losing money!
Now some of you are laughing. What! People really don’t know if their business is making money? They think they know. They look at the bank balance on their ATM receipts and yep, there’s money in the account. Things must be good. Having money in the bank is a good sign but not the only sign. “There is a huge difference between profitability and solvency,” says Egon Nord-Leth, President of Boats in Bags (www.boatsinbags.com) and Nord-Leth Auto (www.nordleth.com). “Just because you have a sale doesn’t mean you have money,” says Nord-Leth. Nord-Leth started his career many years ago in the banking industry and had to become comfortable reading financials. When money comes in, money must also go out. There are costs associated with your inventory or service, plus all of the overhead to run the business.
If you look at nothing else, look at these four reports to get you started:
- Profit & Loss Statement (also called an Income Statement). The Gross Profit figure tells you how well you are doing in relation to selling the product or service only, ignoring your overhead costs. If you’re not making money here, you need to increase your sales prices or negotiate better rates with your suppliers. The Net Income figure at the bottom adds in all the other costs needed to run the business and is your bottom line. Is all of your effort paying off? You should also be looking at the margins on these numbers and comparing them to your own goals and industry averages. Modify your report to automatically calculate these percentages for you. These are warning signs you should be watching.
So…the number is a positive one, that’s good. But don’t stop here! “Liquidity is the real issue for a small business, not just profitability,” Nord-Leth emphasizes.
- Balance Sheet. This report gives a more accurate view of your cash situation. At a quick glance you can see how much you have in the bank, how much your customers owe you (Accounts Receivable), and how much you owe your vendors (Accounts Payable). Look at both your short-term and long-term debt. Do you have the cash to keep your business running? Don’t fool yourself. Look.
- Accounts Receivable Aging. Tells you when customer invoices are due and when you can expect the cash to come in. Don’t let this get out of hand. Establish an effective collection process to ensure you get paid in a timely manner. Adjust your terms when necessary for new clients and those who pay late.
- Accounts Payable Aging. Tells you when you owe money to your vendors. Having a good relationship with your suppliers affects your marketing. Companies want to do business with those who pay their bills on time. As you grow, you can also negotiate better prices and terms.
There is a lot of information in these reports alone. Make sure you are at least looking at these. If you don’t understand them, spend some time with your accountant, financial officer or give us a call so you can get the reports explained to you. The money you spend on that consultation will be paid back many times by your new awareness of your financial situation.
Just having the reports is not enough. You have to read them! As a standard, look at your financial reports once a week. It can be more or less depending on the size of your business but it is good to establish this as a habit. The more you look at the numbers, the better decisions you can make about growing your business. If part of your issue is it’s just not easy to produce to reports, then here are a few tips:
- Save (Memorize in QuickBooks™) the reports with all of the settings you like. Save them in a group called “Weekly Reports”. Then review or print the reports all at once.
- Establish a set day to review reports. Put this on your calendar as a to-do. Run them yourself or have your staff give you the set of reports on this day each week.
- Have your CFO (or whatever you call your financial manager, even if it’s you), assess the reports first and write notes about what is happening and why.
If the information isn’t up-to-date then the reports aren’t giving you accurate data by which to make decisions. Make sure you know if your staff is properly processing the work in a timely manner that feeds the financials. Periodically conduct a surprise audit. Fix your processes so you can get current information each week. Set realistic goals and deadlines when tasks like reconciling the bank and credit card accounts should happen.
It’s unproductive to waste time analyzing bad or outdated data. It’s ineffective to run a business thinking the numbers tell you one thing, when actually there is a different story. If the cost of making your product has increased (due to salaries, supplies, or other overhead) and you haven’t adjusted your selling price accordingly, you are not going to make money. Know your costs. Plus, it never fails. If you fall behind keeping your data current, when you really need it you won’t have time to do the input. Be clear what your financial picture is. Read your financial reports on a regular basis. Let them show you how to make smarter decisions with your money!
