Almost weekly, I will have a business owner call me for advice on their business. One of the usual concerns is always the financial and accounting system of the business. They tell me they feel out of control and lack the information necessary to make informed decisions on the future of their company. Even worse, they tell me they don't have last years taxes done because they are waiting on their accountant and this years books are not current.
Financial information for the business owner is critical. Financial information is used to make decisions both short and long-term. Financial information is used in the planning and budgeting process and to value the business.
There are two basic reasons, besides providing a useful product or performing a meaningful service, for building a business. One is to sell the business at some future date and the other is to franchise the business. With these reasons as the goal, meaningful, timely and accurate financial information is a must for every business owner. You want to build a business so that people bring other people to your business telling and showing other people what an incredible and successful business you have. Therefore, your financial and accounting systems are important ingredients to the success of your business.
The main purpose of the financial and accounting systems for every business should be to provide information to be used in the decision making process. Accounting is both the art and the science of systematically recording, classifying, summarizing, analyzing and reporting financial information so that it can be used to make financial decisions within the organization and to report information to users both within and outside of the organization.
Today is July, 11, 2008. I believe every small business should have their financial information complete through June 30, 2008. The following are the important reports for every business owner:
- Balance Sheet
- Income Statement
- Cash Flow Statement
Balance Sheet
The balance sheet reports the assets, liabilities and equity of the business. It is a picture of the business at a particular point in time. The balance sheet reports total assets, such as cash, accounts receivable, inventory and equipment. The balance sheet also reports total liabilities, such as accounts payable, accrued liabilities and notes payable. The difference between the assets and the liabilities is the equity of the business. The equity of a business is an important number.
Income Statement
The income statement reports revenues, expenses and the resulting net income of the business. The income statement tells the "story" of the operations of the business for a period of time. It could be one month, one quarter or one year.
Cash Flow Statement
The cash flow statement explains the reasons for changes in the cash balance, showing all the sources and uses of cash in the operating, financing and investing activities of the business.
In addition to the above financial reports, financial ratio's and other key indicators are important. Think of these like the meters and lights on the dashboard of an automobile. Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the company's financials to those of other company's.
I will be discussing these ratio's in future articles, but it is always a good idea to have a few that you always monitor. One of my clients always required three numbers from her accounting department each week; cash, accounts receivable and accounts payable. It might be something simple like average sale per customer. Financial ratio's are important for every business.
This is all for now. If you have any questions, you can always contact me at marty@martymcevoy.com. In addition, I would love your feedback to this post.
Take care,
Marty
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7/10/08
by Marty McEvoy
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