Why you should review your financial reports regularly
Save for that last manic week before April 15, many entrepreneurs let their financial statements sit around all year gathering dust. But those business owners who take the time to regularly review their A/R, A/P, income statements and balance sheet tend to fare better in the long run, argues financial consultant Keith Kohler, because it helps them gauge the health of their business and confront problems as they arise.
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As the calendar marches toward April 15, small business owners start to feel the anxiety set in. Entrepreneurs’ annual, one-time-only visit to their accountants—and perhaps one-time-only review of their financial statements—finally arrives, often at the last possible minute.
The obvious questions arise:
Does your business owe money?
Is the company profitable?
Will there be surprises?
Is everything accurate?
Who knows?
And, more importantly, do you know?
It is amazing how many small businesses find themselves in this situation, especially in the age of QuickBooks (or other accounting software). Any amount of time and money spent to input and properly account for your data is an excellent investment.
Now, nearly every company I've spoken with in recent years uses accounting software and is confident that the data entered are accurate. But here's what's even more amazing—when I ask the question, "When was the last time you reviewed your results?" it is usually met with silence.
Do you know how to generate reports from your accounting software, specifically the balance sheet, income statement, accounts receivable, and accounts payable?
Many business owners—even the most near-sighted, fire-putting-out-focused owners—are somewhat familiar with A/R and A/P. They usually know "who owes me how much" and "how much do I owe," but that's generally the extent of their document review.
The solution: Get comfortable with your statements
Why review your balance sheet & income statement?
The balance sheet is a temperature reading of the current health of a business.
The income statement reflects revenues, costs of goods, expenses, and profitability (or losses).
Together, they offer a complete picture of health or any notion of illness. If you review these four key documents (including A/R and A/P) regularly, the benefits to your operation are tremendous and immediate. You'll know what is working and what isn't, and the reports and their analyses will serve as the basis for informed decision-making.
What can you learn from this review?
Here's just one example: Do you have any revenue concentration issues? That is, do too few companies account for the majority of your revenues? If your A/R shows that your top three customers are over two thirds of your total revenue, this is highly risky. The more diversified you are, the better. If this is your case, you must develop a plan immediately to grow existing customers or find new ones.
I strongly recommend reviewing your A/R and A/P each week, and your balance sheet and income statement twice monthly.
Schedule this in your calendar as you would any other appointment and stick to it. Get all the right people involved (including your accountant or the members of your staff) and be committed to analyzing the data and executing the recommendations derived from that analysis. Beyond your current and immediate needs, this review should also serve as the basis for yearly projections, goal-setting, and longer-range business planning.
For greater depth and learning, sign up for my upcoming lesson where I will give you more insights into understanding your income statement and using this knowledge to strengthen your business, and your attractiveness to potential capital sources.
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