I hope this post finds everyone doing well and that you are having a great day so far! The following post addresses an issue I typically encounter with many of the small businesses I work with. Lets get started.....
Week of March 6, 2017: Make it Make Sense to You!
The goal of accounting in a business should be to provide management with the information needed to make timely and informed decisions. However, this is often not the case. There are many reasons a company might not be getting the information it needs. For this post we are going to focus on some key items to improve your record keeping instead of telling you where all the problems could be.
Use your Balance Sheet
Many of the businesses owners we work with typically focus on the Profit and Loss Statement (i.e. Net Income). However, the balance sheet is equally as important. The balance sheet records your Assets, Liabilities, & Equity as of a given date. Also given how creative accountants are, Assets will always equal Liabilities plus Equity (i.e. they balance), therefore the statement is called the balance sheet.
Assets are things you will use in the future. Liabilities and Equity are where your assets come from. For example, taking a loan (liability) to purchase a car (asset).
To get the most value out of your balance sheet you need to use the accrual method of accounting (regardless of what tax method you are on). The accrual method is where you recognize revenues as they are earned (i.e. completed a job) and expenses as they are incurred (i.e. using supplies). By using the accrual method we can reasonably insure expenses are in the correct accounting period and can have an idea of what future cash inflows and outflows might look like even if an invoice has not been generated yet.
Use non-financial metrics
When financial data is used by itself, it is a useful historical tool (i.e. for tax reporting). However, when you match financial data with a non-financial metric the information can now be used to help forecast and identify potential problems in your operations.
For example, a manufacturing company might look at total payroll spend per unit produced. This information could help the company make sure its labor costs are remaining inline with its cost models and can provide the information needed to revise production costs if needed.
The goal with matching financial and non-financial metrics is to create ratios which provide management with the data needed to run the company. It is the accountants job to help develop and implement the systems to get this information to management
Track what adds value to your decision making
At the end of the of the day it is your company and your set of books. Therefore, track the information which helps you manage your business in detail and let the other information be generically coded. Then continue to be dynamic in your tracking of this information. As information needs of your company adapt, your reporting systems must adapt with them. For example, the way something was reported last year might not be the same way we report it in the current year.
Basically, do not let your information be "shoe-horned" into a format which does not benefit your decision process.
To help improve your reporting capabilities you must understand the tools which are available to you and how to use them in conjunction with one another. This is true in understanding the importance of how the Balance Sheet helps insure the Profit & Loss statement is accurate and how tracking non-financial data can help forecast future periods. Once we know which tools are available, we must understand new tools can be added and old ones removed by matching what information we track with the current needs of the business
Key Takeaway: It is your company and your decisions, make it make sense to you.