Introduction
For some small businesses and even for some medium sized business, there are problems with monthly financial reporting that the business owner may not even realize.
Before I started working with one business owner, he would only get a financial report from his bookkeeper once a year, a few months after the year end. He could only guess how he was doing sales wise and had no idea of the business’s profitability through-out the whole year. When it came to cash flow, he could only look at the bank account online and try to remember what money he was expecting in and what payments would be made soon. He was running his business completely blind.
Now this story might be the extreme, but many business owners are also running their business blind.
Another example is my clients is Joelle, who runs a 60-person company that providing welding and millwright services to mining companies. Before contacting Copious Insights, cash flow was always a concern, and she couldn’t rely on monthly financial information to decide whether to hire more people. Now she receives useful and accurate financial information, has more than enough cash flow, is quickly growing her business and has a plan to make the business easier to run as it continues to grow.
Not Useful Reporting
I have come across many owners that ask for financial information from their accountant or bookkeeper and don’t receive any reports or must wait several weeks. Then what they do get is usually just an income statement with a single column of numbers. It is difficult to get much useful information from a report with a single column of numbers. It needs to have some comparisons to the previous year and to a forecast or budget. It also needs to show the percentage each line of expense is to revenue or sales so you can see if these expenses as a percentage of revenue is increasing or decreasing. It needs to show the amount of Gross Margin earned. This is the revenue minus the direct expenses that were incurred in making or providing the product or service. This Gross Margin helps you to know if you are charging enough for your product or service. I find many businesses don’t show Gross Margin on their income statement or it isn’t calculated properly.
Then there is the Balance Sheet. This statement is often ignored by business owners because they don’t understand it and have a hard time getting any useful information from it. Again, if it is a single column of numbers, it is difficult to get anything useful from it. It should be compared to the previous year and to a budget or forecast.
Even when the Balance Sheet shows a comparison to the previous year and to budget or forecast, it can be difficult to know if receivables and inventory are too high or if the Balance Sheet would be considered healthy. This is where ratios or Key Performance Indicators (KPI) can help. I will write a separate blog article on KPIs since it is a large topic.
Reporting Accuracy
Now, the next thing to consider is reporting accuracy. Even if you, as a business owner, get regular reporting that is more than a single column of numbers, it is often not accurate. Here are some indicators that would show that your financial reports are not accurate:
- Big swings in profit and loss from one month to the next.
- Big difference from the statements provided to your external accountants and what you got back from them after the year end.
- Loan statements from your bank don’t agree with the balance outstanding showing on your Balance Sheet.
Why is this inaccuracy happening on the financial reporting for so many businesses? It really comes down to your bookkeeper or accountant not recording all entries properly and waiting for the external accountant to provide them with the required year-end entries. The problem with this is that the financial reports are inaccurate all year long and the business owner doesn’t have a clear idea on how the business is really doing. Again, they are running their business blind and when they run their business blind, there is no opportunity to make adjustments to the business so that it can get back on track or have the information needed to make informed decisions.
Some examples of incorrect or missed entries include:
- Recording a sale in one month and the related direct expenses in a different month.
- Recording the whole loan payment to either interest expense or to the liability account without dividing the payment between interest and principal.
- Recording insurance expense for the whole year as an expense in the month paid instead of spreading that expense over 12 months.
- Not recording depreciation expense at all.
- Not estimating income tax expense.
- Not adjusting inventory levels until year-end.
Often bookkeepers haven’t been trained on how to properly do these entries and thus why they leave it for external accountants to do. However external accountants only look at the books once year, usually three to five months after the year end.
Conclusion
This is where Copious Insights can help, by being your business’s Part-time CFO. We help our clients get accurate and useful financial reporting so that they know how their business is really doing and understand the reports they get so they can make more informed decisions. Business Owners no longer run their business blind but have someone with financial and business expertise to bounce ideas off of and guide them to reach their goals.