Running your business based on the balance and transactions in your account, is like running your car with only the knowledge that you spent $50 on fuel last Tuesday. It has no context.
• How far have you driven since then?
• How much fuel is left in the tank?
• Where do you have to get to for the rest of the week?)
Here are a few reasons why your bank balance isn’t the greatest gauge for your business:
• While it will tell you which of your customers have paid it doesn’t tell you how much you still have yet to collect and when it is due.
• While it may tell you which of your bills you have paid, it doesn’t tell you how much you have left to pay and when it needs to be paid by.
• It doesn’t tell you what your GST or your PAYG income tax obligations are going to be (this can be a HUGE strain on your cashflow if you aren’t putting money aside for it AS YOU EARN your income)
• It doesn’t tell you what other bills are coming up (insurance premiums, wages expectations, phone bills, fuel, loan repayments, need I go on?)
• MOST IMPORTANTLY – it doesn’t tell you if you are making a profit. If you are spending more than you are earning, you are in trouble. Your bank balance just doesn’t give you that figure mostly because of “Lags” between when you get money and when you pay it out, but also because of the possibility of OVERSPENDING.
Big Business can’t be wrong in this area, there are tried and tested financial reports, which give you the information you need to know about your business. With advances in technology, your bookkeeping software can give you this information in the blink of an eye. There are three key problems that must be solved first though, before this information can be used.
1. Your accounts need to be structured in a way that they can give meaningful information (that reflect YOUR business and how it runs)
2. Your transactions need to be “coded” correctly by your bookkeeper so that the information appears in the right spots on your reports.
3. Finally, the information has to be coded correctly, in order to give you meaningful information. You should check your General Ledger each month to make sure things are where they should be, or you could be relying on faulty information. Garbage In, Garbage Out!
