Not using the financial data produced in your business is like driving a car with no speedometer, no map book and no fuel gauge. You can still drive, but gee it’s a lot more stressful than it needs to be!
I feel both utter frustration and complete empathy for the number of businesses I speak to who don’t use the financial reports in their business to help steer their business strategy and manage their profitability and cashflow. Many businesses know the information is there but can’t trust, understand or rely on it and so it ends up going in the “too hard” basket.
The financial data you are already collecting can be a goldmine of insight when (and this is the key part) it’s structured correctly to suit you and the way you manage your business. Here are just some of the things your accounting system can or should be able to tell you from a business management perspective, quickly and easily:
- When your money is likely to come in, when it needs to go out and how much you’ll have left
- Which parts of your business are a cash drain and which expenses are truly contributing to your profits.
- How effective your marketing efforts are.
- Whether your performance is up or down year on year, (and adjusted for seasonal changes in your business)
- Whether you’re experiencing profit squeeze (your sales are up but profits are down) and why
- Answering all of those “what-if” questions that you lie awake at night thinking about:
- Should I buy that equipment or rent it?
- Should I employ people or sub-contract?
- When is the right time to hire additional staff and will I have the money to pay them?
- Am I better off buying components or making them myself?
- Which products/services are worth continuing to provide and which aren’t?
- When should I invest in more stock, new equipment or training?
- Your income and cost per unit/service
So if it’s so useful, why don’t people look at their financials on a regular basis? Here are the top five reasons I’ve come across:
#1 Managing your business from your bank account or worse, by intuition, instead of by the numbers
I call this the “She’ll be right” of business management. If there’s money in the account, all’s well, if not, better call up a few customers to get some debts collected. Your bank balance is not reflective of your business performance. It’s simply a snapshot of your bank account. Once your business reaches a certain size, it’s just not possible to be cognoscente of the whole picture. How can you possibly know what’s been paid and whether or not you have been paid by your customers? What bills are in the system, what bills are waiting to be processed? Of the bills in the system, when are they due? Can you stretch them out or will they be paid straight away?
Make sure your bookkeeper has all bills and invoices entered into the system by a set date each day or each week, that your inventory is correct and all of your bank accounts have been reconciled. This includes receipts for things you’ve bought but haven’t given to admin to be entered yet (they’re no good in your glovebox!) and any other incidentals. Then you can look at your debtors and creditors lists (and the due dates of these balances), as well as your recurring payments (rent, lease payments, tax obligations etc). From there, you can create some meaningful (no surprises) cashflow projections.
#2 Hoping your Bookkeeper or Accountant has set up your accounts correctly so your business runs properly
Do you have a drawer full of cables that look like a bowl of spaghetti? It just causes stress at the thought of trying to sort through it all. Unfortunately, many businesses run their accounting systems like that. It can sometimes feel like looking for a needle in a haystack if your accounts aren’t set up correctly and you’re looking for performance related information.
Your Accountant or Bookkeeper will generally set up the accounts in a way that is meaningful to them to make it simple to complete the BAS or your tax returns.
If your accounts aren’t organised in a way that’s reflective of yourbusiness and how it operates, the information it produces won’t make sense. (I hope your Chart of Accounts isn’t set up in alphabetical order – that’s just for the Tax Accountants!) Transactions are like the spaghetti of cables referred to above. You need to take control and organise them so that they are in a structured format that is meaningful to you.
A good set of management accounts will be structured with costs grouped together with the income those costs produce (or should produce). From here you can determine the gross profit of your different products and services, make comparisons and obtain summary information but also be able to drill down into problem areas. We are essentially talking here about a business dashboard. When coupled with a business budget, warning lights will appear in your financials when performance doesn’t meet expectations, so that you can drill down when needed. All of the major accounting packages have the functionality to do this to a certain extent; you just need to customise them to your needs.
By the way, this won’t interfere with the work your Tax Accountant or Bookkeeper needs to do. They can “zip up” the transactions at the end of the period to suit their needs. Eg. you might have split up costs by each service vehicle, they will just combine those accounts to get an overall number for service vehicle costs for the business at tax/BAS time.
#3 Not knowing your REAL financial position because you don’t or can’t TRUST the info in your financial reports. It’s frustrating and time consuming.
The business owners I’ve come across who do sort their accounts in a 
meaningful way and then print out reports generally have a very frustrating first few meetings, an argument or two about the inaccuracy of the data, what it includes and what it doesn’t include etc. They then throw it all in the bin and give up on reporting because “it’s not making sense”.
As stated, you need to have a cut off day of the week/month where all of the accounts are totally up to date so that you are sure that all of the transactions relating to that period are in the accounts. You also need to have the transactions recorded to the same accounts each time they are entered so that they are grouped in a meaningful way. For example if you have separate accounts for service vehicles and admin vehicles, then the guy filling up his petrol and the bookkeeper need to know which receipts are for service work and which receipts are for admin. It then needs to be recorded correctly and someone needs to verify all of this before the reports are printed so that you can be confident that the information is accurate.
Nobody wants to be making decisions in their business based on inaccurate data. Like any sort of organising system, it takes a fair bit of planning to setup in a meaningful way, but even more discipline to maintain it. Unfortunately it’s not always a quick fix either, although the rewards are definitely there if you persevere.
#4 Being afraid of the results and/or not acting on the critical information in these reports and using them to drive your business
The ostrich approach! I might not like what is in there, so I’m not going to look. Or it told me what I needed to do, but I don’t want to take action or it might take care of itself. You created this business to make money, if an employee or system of process is not performing the way it is supposed to, you need to take action. Your accounts will show you if your sales person isn’t pulling their weight and to what extent it’s costing you, or if your machinery is costing a fortune in maintenance and slowing production. It’s very hard to ignore when it is there in black and white and you need to take control and fix those things immediately.
If you always do what you’ve always done, you’ll always get what you’ve always got. Take action and take control of the future of your business.
#5 Not having a workable budget
There, I said it “BUDGET”. It’s not a dirty word, it’s smart business. You wouldn’t just hop in the car and take a drive hoping to arrive at a destination, so why would you do this in your business? Your budget is the planned journey and your GPS to tell you how your tracking against that plan is your financial statements. A good budget is an estimate of planned income and expenses adjusted for seasonal changes in your business. You accounting system will then compare this budget information with your actual performance and tell you how you’re tracking against the plan.
A word of caution here, just because you made $x amount of profit based on $x amount of sales last year, don’t assume that “past predicts future”. It’s like saying the time taken to drive to the city is constant. Peak hour will drag that time out and school holidays/weekends will shorten it.
It’s the same in your business, so please don’t just get last year’s income and “divide it by 12” for next year’s budget, it will cause stress and frustration. It needs to be adjusted for seasonality and improvements in efficiency that may occur.
WANT MORE?
I LOVE helping businesses with this sort of thing because I have seen the results that happen when it is done. Profits soar, stress plummets and life just gets a little bit easier. Whether it’s “Sound me out”, “Help Me do it” or “Do it for Me”, what’s important to me is that businesses are getting this information and using it. I work with Xero and MYOB every day, so if you have any “how to” questions about setting this up in your business, I can help with that too. As a Xero Integrator, I can also help with add on software that will compliment the information you can obtain from Xero. So let me help! Don’t be afraid to pick up the phone, let’s have a chat.
