The stereotypical image of the small business owner (OK, perhaps the old school business owner) this time of year is the guy or gal who walks into the accountant's office with a shoe box filled with receipts. "Here's my info for my tax return," they tell the receptionist. "Let me know when they're done and I'll come in and pick them up."
This method of accounting shows the owner results on an annual basis, which is not nearly enough or current enough data to help him or her make decisions about the running of the business. With annual tax reporting as the only financial information on the business (with the exception perhaps of the checking account balance,) an owner could be miles behind a negative trend and miss an opportunity to make changes before the business is in jeopardy.
So there's the case for more frequent financial reporting - monthly or even weekly data can enable you to notice what is or isn't happening in the business so you can make improvements along the way. It's not difficult or expensive to set this up, especially if you have basic computing skills (and of course if you're reading this you're on the computer.) You can use Quicken, Quick Books, or even a simple Excel spreadsheet to keep track of what's coming in and what's going back out. They may even dramatically provide an additional benefit by reducing the amount of time you need to invest in completing the financial management-related tasks.
Once you have established a basic profit and loss statement (p & l) you can use comparisons to help you notice changes in the business. Look at this month's numbers against last month's results, and compare them with this same month last year.
There are so many ways in which you can "slice and dice" the information - if you are collecting it - to help you make decisions about the business. If you're collecting the data you will be able to determine things like:
When you're writing checks on a daily or weekly basis, it's easy to lose the big picture. Your P & L will help you to see your business. It might be the ultimate management tool - if you choose to dig in and use it.
- Who are my top 5 customers, and what percent of my total revenue does each of them represent?
- Is my customer base growing, staying the same, or shrinking? (Then you can ask yourself why, and take steps toward creating more and more customer loyalty.)
- What products or services are generating the most revenue? (Then you can determine where you want to expand or contract your offerings.)
- What products or services have the best (or worst) gross profit? (Gross profit is what's left over after you purchase raw goods and pay to manufacture them into a final saleable product.) Then you can make decisions about supplier pricing, process improvement needs, etc.
- How productive are my employees? Am I spending a disproportionately large amount on payroll and its associated costs?
If you are feeling a bit uneasy about this part of the business, talk to your accountant. He or she would be happy to help you get set up - remember that better reporting for your management purposes will probably result in better financial records for your accountant's purposes. If you want to know more, check out your local bookstore, or take a class on bookkeeping to get the basics. Without a good understanding of the financials, you're running your business wearing blinders.