Which are the most important numbers to know to monitor the health of your business? How important is it really to create financial statements every single month?
Most of our SMB clients started their business because they are passionate about what they do, but usually they do not have any sort of professional training on how to manage financial side of their business before they start their business. As a result, while they know how to keep their clients happy and satisfied, they feel helpless about how to make sure their business is financially profitable to allow them to remain in business.
Many business owners tend to try to just “get by” with some bare bones accounting and pretty much tend to just ignore digging too far into it. However, it is extremely risky for the SMB business owner to take this approach with their business’ profitability. A chef I know suddenly had to close his restaurant recently and go back to working for a chain restaurant in town. He is extremely talented and passionate, and his clients loved his food, but he was so focused on keeping his clients happy and satisfied that he never put much time or effort into looking at the financial condition of his business. Suddenly, he ran out of cash to pay the bills, and he didn’t know how to solve this problem, let alone have the insight to have seen the trend coming to be able to deal with it much earlier.
I think he might have avoided this problem if he had put some things into place on the financial side of his business. So let’s talk about why it is important to create Financial Reports for your business?
- 1. Internal Decision Making
Financial reports are very useful for the internal decision-making of a company as it helps the owner to see trends and ratios that provide the insight needed to make future decisions. It also provides insight into the financial stability of the company so the owner can manage their expenses and other business activities accordingly.
- 2. Taxes
This is one of the biggest reasons that every business HAS to have financial reports. The business owner is charged taxes based on what his earnings were during the year, so it is important to make sure that all income and expenses have been accounted for accurately to arrive at that final number.
- 3. Banks and Investors
Suppose you want to invest in a company – you will definitely want to know how well the company is doing and how much return you will get back on your investment. Financial reports provide the granular insights to banks or investors on the key financials of your company. If an owner cannot readily provide those financials, or they are in disarray, the bank or investor will think twice about investing in that company.
So, now let’s talk about some of the important things that business owners should consider while preparing or reviewing the financial reports for their organization:
- 1. Profit is the bottom line
- 2. Tracking Expenses
- 3. Accounts Receivable
- 4. Profit per Client
- 5. Accounts Payable
We will delve into each of these topics in detail in this blog series…