You Would Never Think of Driving Your Car Using Only the Rear View Mirror To See. Your Business is No Different.Oct 04, 2020
Unfortunately, financial management has been made incredibly difficult to understand, so it’s not surprising so many entrepreneurs simply rely on their gut.
- Software companies promote systems as being user friendly – no bookkeeping knowledge required. Wrong!
- Many small entrepreneurial companies get their books sorted out just in time for taxes to be filed to start all over again.
- Rarely are they in good enough shape to be usable IF the business owner knows how to use them.
- Even if you do have accurate books, by the middle of the following month the information is too old to actually DRIVE the business. Think of driving your car using only the rear view mirror.
- And it’s often formatted for tax purposes, not for decision making.
How Much Do YOU Actually Use Your Financial Information To Make Decisions, Plan, or Actually Drive Your Business?
There’s no question, financial statements are useful for certain things. If your books are not squared away, you’ll want to get them fixed. But while you could be the exception – isn’t one of the main reasons why you don’t pay as much attention to your record keeping as you think you should or learning how financial statements work, is deep down, you know you’re better off trusting your gut? Maybe not all, but you’re probably already aware on some level of some of the 5 bullets listed above. That thinking is usually based on what you’ve experienced so far working with your book keeper and accountant.
IT”S NOT YOUR FAULT!
Your books are required by the IRS to be based on what is called “The Accounting Equation” as well as GAAP or “Generally Accepted Accounting Principles.”As the owner of a business (with personal guarantees with your vendors and creditors), you’re the ultimate investor. This is a quote directly from Investopedia:
“Limits of the Accounting Equation”
Although the balance sheet always balances out, the accounting equation doesn’t provide investors as to how well a company is performing. Instead, investors must interpret the numbers and decide for themselves whether the company has too many or too few liabilities, not enough assets or perhaps too many assets, or is financing the company properly to ensure long term growth.”
I’m not saying that you should ignore your accounting system or just throw all your receipts in a shoe box. Not at all. If you’re starting a business, I absolutely recommend getting off on the right foot and have your accounting system set up and maintained properly. You can usually outsource it to a local QuickBooks specialist, even if you have a staff (or family) member do much of the data entry.
And if your business is already up and running, but you don’t have timely and accurate financial statements, getting them unscrewed should be somewhere on your priority list.
There’s information in your financial statements you need for long term planning. No matter what phase your business is in, planning is essential if you expect your business to survive much less thrive. But in terms of developing an action plan, they’re very limited. Properly formatted, timely, and accurate financial statements are necessary for planning and longer term decisions. For example, one of the biggest things to be clear on is “How much do we need to sell at what margin to hit our profit target?”
If you sell different types or categories of products or services, it’s actually a mix of margins.
You Can Have the Information You Need To See to Actually Drive Your Business In Weeks Not Months.
Make sure to read my blog article “The Easiest and Fastest Way to Power Up Your Business’ Performance” to learn what numbers you DO need to be looking at so you can see well enough to drive your business.