How often do you look at the financial reports of your business? How often should you look at them? Abdicating responsibility for the financial aspects of your business is a recipe for disaster. So it’s not a case of whether to look at your numbers, it’s a case of what reports and when.
Owning a business means you have to be responsible for all aspects. That doesn’t mean that you have to do them all, or even that you fully understand it all, but rather that you have a good overview and keep your finger on the pulse of the business as a whole.
The majority of business owners lack knowledge in three to four critical areas of their business, namely: finances, legal, HR and, sales and marketing. You have three choices on how to handle these areas:
- Do it yourself. This involves spending time learning all about what you need to know.
- Get expert support. Find the right expert who will not only support you but also educate you too so that you can make more decisions yourself as time goes by.
- Bury your head in the sand and hope that it will either go away or sort itself out on its own. Never going to happen.
Whether you DIY or get expert support, as the owner of the business you need to be looking at the numbers on a regular basis.
Aged Accounts Receivable – this is the summary of who owes you money. This should be looked at weekly at a minimum. The information in this report identifies who you need to be chasing up to get paid based on how long the invoices are outstanding. This is key to keeping a regular cash flow coming into your bank account.
Aged Accounts Payable – this is the summary of who you owe money to. I recommend building up to a position where you pay your invoices on a monthly basis, however, if cash flow is tight, reviewing this report on a weekly or fortnightly basis may be necessary. Use this report to look at who you owe money to and when it is due to be paid to ensure you are paying your bills on time.
Profit and Loss Statement – Actuals – this report should be looked at on a monthly basis. Have the report prepared so that you can see the previous two to three months as well on the one report. This report will tell you whether you’ve made a profit and, comparing with previous months, gives you information as to how your income and expenses have changed relative to previous months. Take a good hard look at the expenses and identify if there are any that can be eliminated, or whether you can get a better deal with an alternate supplier which would reduce the costs.
Profit and Loss Statement – Actual vs Budget – this report should also be looked at on a monthly basis as long as you have prepared a budget and loaded it into your accounting system, which you should (see below). The benefit of this report is comparing the numbers against what you had budgeted (planned) to have during that month. Have a good hard look at any numbers that are significantly different to the budget, consider why and then think of whether this will continue or whether you could find a way to make sure that next month’s numbers are on the budget.
Balance Sheet – this report shows what the business owns (Assets) and what the business owes (Liabilities). It is good to look at this on a monthly basis in conjunction with your cash flow (see below). Take particular notice of the balances of money in the bank and accounts receivable vs accounts payable and tax liabilities. You will always want the total of money in the bank and accounts receivable to be a bigger number than the total of the accounts payable and tax liabilities.
Budget – this is a summary of your plan for the business in numbers. A budget is your plan for how much revenue you think you will make, month by month, and a summary of every item of expense that you need to keep the business running also on a month by month basis. There are two benefits of creating a budget. The first is that you’ve set goals for the business, it helps to keep you focused on achieving those goals as you have a target to aim for. The second benefit is being able to check in on a monthly basis to see how you’re going by looking at the Profit and Loss Statement – Actual vs Budget that I referred to above.
Cash Flow Forecast – once you’ve prepared a budget, you need to convert it into a cash flow forecast taking into account when you expect to receive payment for your income, and when you have to pay your bills. A full twelve-month cash flow can be prepared from the budget and I recommend a more detailed 12-week cash flow forecast where you plan out money coming in and going out on a weekly basis. This should be reviewed and updated on a monthly basis.
Make sure that your accounting records are updated weekly and put aside 15-30 minutes each week in your calendar to check your weekly reports and then an hour or so every month and you’ll have a much clearer view of your numbers and be able to use the information in the reports to increase your profit.
