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Probably not. It isn’t the appropriate attire for getting down and dirty and getting the work done. And you probably wouldn’t wear your barn clothes to meet with your banker to review your line of credit. Maybe you don’t wear a suit, but you probably adapt somewhat for this type of meeting.
When it comes to your financial information, just like your work clothes and your formal clothes, there are formal and casual statements and reports. Each has its place and purpose.
This is the time of year most businesses are “getting their books done”. If this is the only time you look at your financial data, chances are you are only taking the “formal’ approach to your finances. You see your accounting as a compliance task. Preparing what needs to be done to satisfy others. Your accountant prepares the required IRS tax filings and financial statements that your banker requires. Your formal financial statements may consist of:
- Balance sheet
- Income statement (P&L)
- Statement of Cash Flow
Formal financial statements and tax filings are prepared in accordance with very specific rules and regulations. That creates common ground for reading and evaluating the financial status of any company. Your banker or investors can use these reports and have a good understanding of your financial position. They can determine if your company is financially healthy or not.
But what about the “work” of your business? This isn’t about the compliance side. This is about the decision making process. Yes, you will probably look at your formal financial statements to help you make decisions. But, all of these reports were prepared based on those strict rules and regulations. In other words, someone elses agenda. What other information or financial reports are better suited to helping you keep your finger on the pulse of your financial health.
Management reports are limited only by your imagination. Honing in on the key indicators that really drive your success is the goal. Think about what really makes a difference in your financial success. Develop reports to actively track these indicators. Train your team to understand the importance of these indicators and how to read these reports. It isn’t just another compliance procedure for them to follow by rote. The purpose is to stay on top of what matters. Don’t create a bunch of TPS reports that nobody uses.
These are the real drivers of the day to day managment of your finances. The reports that help you keep tabs on things everyday rather than relying on gut instinct. You need to get down and dirty with the numbers with things like:
- Budgets
- Cash Flow Projections
- Accounts Receivable Aging Reports
- Accounts Payable Reports
- Ratio analysis
- Sales Reports
- Inventory Levels
These are the planning and management tools that take you from the compliance way of thinking to planning and decision making. They should help you answer questions like:
- How many months expenses do we have in our cash reserves?
- Is our inventory building or depleting?
- Do we have inventory problems such as old inventory or theft?
- Are people taking longer than normal to pay us? Why is that and what can we do about it?
- Can we/should we raise our prices?
- Do we need an expansion plan?
- Should we lease the new equipment that we need or should we buy?
Sound financial management is a combination of math and business judgement. Having good financial data is a foundation for building your decision making skills.
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