An especially true business maxim is that familiarity with financial statements validates the success you believe is unfolding and removes obstacles that cloud your judgment. The rewarding insight delivered by scrutiny of financial details is far superior to merely maintaining a general impression.
Knowing Current Events
Monitoring financial statements at least monthly ladles out truth serum about the causes of profitability. Sometimes, robust sales don’t really increase profits. In many instances, rising revenue may trigger much greater costs. Hence, inspection of the trend in profit margin in crucial. If variable costs increase faster than sales, profit margin suffers. And growth opportunity for your business is stunted until you address the environment for expansion.
Remember that accrual basis financial statements present the best reflection of current conditions. Revenue is counted when earned under this system, regardless of when it’s collected. Expenses are recorded as they’re incurred, not when paid. Consequently, accrual basis tends to match the timing of expenses to the periods in which they produce revenue.
Since a business runs on cash, however, you’ll also want a cash flow statement. This report compensates for accrued revenue not yet collected and accrued expenses not yet paid. If customers usually pay your invoices immediately and you remit payment of your bills promptly after receipt, cash basis financial statements are typically adequate. They will deliver the same general figures as accrual basis reporting and eliminate the need for resorting to a cash flow statement. Many astute entrepreneurs use accrual financial statements for decision-making and cash basis financials for income tax reporting. Accounting software commonly produces reports for either method.
Cash flow is also impacted by money that flows to categories such as loan repayment and equipment purchases. Evaluation of the business balance sheet reveals the magnitude of these changing balances. Moreover, the balance sheet shows compensation to you as the owner or shareholder of your company. Make sure you’re not drawing too much. Your take comes after meeting priorities that keep the business prospering.
Avoiding Old News
Waiting until year-end to examine financial results inevitably leads to false interpretations of conditions. Knowledgeable entrepreneurs with businesses of all sizes insist on accurate monthly bookkeeping. If they maintain their own accounting system, they get recurring professional help to correct errors and omissions as well as guide interpretation of financial fitness.
Professional bookkeeping is almost always a must for businesses where accrual accounting is beneficial. Such cases are operations experiencing substantial time lags awaiting customer payments and where most expenses vary with revenue. The accrual method eliminates wide swings in profitability rendered by the cash basis.
Extras
Businesses performing contract projects for customers should know the profitability of each individual job. Job profitability accounting necessitates that your bookkeeper receive sufficient information to properly record events. For example, a bulk purchase for multiple jobs must be allocated among various projects.
With timely and accurate financial statements following an optimal methodology, year-end surprises are averted, profitable opportunities are detected, and improvements are immediately implemented.
The Finance Writer 