Small-business owners don’t need an accounting or financial background to use a few key numbers to help their company thrive.
To keep the business on the right path for ongoing success, entrepreneurs should regularly examine central measures in their company’s financial reports. This basic information can transform routine operations into productive actions.
This review begins with an assessment of overall profit trends as well as an examination of the profitability of specific products or projects. To do this, you must first ensure that the data being reviewed is providing useful and accurate information.
Keep in mind that you don’t have to be a numbers person to recognize whether you have solid financial reports. But before you can review what your figures convey, they must be understandable. If your bookkeeping procedures and formats are off track, evaluating them won’t help. If your books need a bit of organization, start with classifications.
Classify for Clarity
Your bookkeeper needs sufficient information to properly categorize all expenditures and revenue. Expense accounts should be grouped in a fashion that makes sense to you. You may want to generate reports by classification for various projects or product lines. This requires clearly identifying the classes for all amounts spent or earned. Some types of businesses may have recurring projects for ongoing clients. If you’re one of these, each client may be a classification.
Having the right classification system and the procedures for providing category information to your bookkeeper allows you to create functional income statements. Examine the report by class to ensure that all sales have been properly classified. Confirm that all expenses are appropriately applied to the correct classes.
Now you can easily identify the profitability of projects, product lines, or specific clients. Better yet, you can generate an income statement that compares the period that recently ended with the same period a month ago or a year ago. This gives you the opportunity to quickly see trends in revenue categories and types of spending.
Balance for Better Business
Accurate bookkeeping relies on double-entry accounting. This is a system where every increase in cash is the result of a balanced increase in either debt or profit (from adding revenue). Every decrease in cash is triggered by either a decrease in debt or less profit (due to an expense). The only exception is that some cash decreases may add a different type of asset other than money, such as equipment or other property.
Regardless of what classification applies to incoming or outgoing cash, your bank account is always impacted. Making sure you’ve captured all bank transactions is simply a matter of reconciling your bookkeeping with your bank statements. Asking your bookkeeper for this reconciliation report ensures that all transactions are recorded and reconciled.
The company balance sheet is therefore an important report to inspect. This is the summary of your assets balanced against your liabilities owed and your business capital. The latter includes your investments plus cumulative profits you have not taken out of the business.
Obviously, your aim is to keep enough cash and incoming receivables to cover upcoming bills owed. And don’t let debt vastly overtake capital.
This ongoing evaluation of financial statements will provide the foundation needed to build a solid business that consistently delivers outstanding products and services.