Attempting to run a company without good financial statements is like attempting to call football plays without being aware of the score. Irrespective of your coaching skills and experience, it will be impossible to call a successful play. However, despite knowing how detrimental playing without information is there are many business owners who attempt to run their companies using this approach. They use financial statements that are, at best, not useful for any effective decision-making.
In this situation, the financial statements will typically be inaccurate and small business owners find that the statements received are no longer relevant. An entrepreneur who counts on their company to provide consistent income needs continuous and regular statements; however, if they are inconsistent the chances are the company will fail. This article will provide information on how to upgrade the reporting system and make financial statements useful.
• Using The Correct System When working with financial statements, it is recommended that the company use an accrual accounting system rather than a cash system. Contrary to belief, the accrual system is more beneficial when matching expenses because it reports revenue and associated expenditure in the company over the financial year. A cash system will not account for the variations in monthly reports, and there may be a lack of performance understanding.
• Ensure Accurate Accounting Measures It is highly recommended that you separate the costs directly according to the product, service or additional expense. By separating the costs, it is possible to determine a gross margin percentage. This is significant because a dramatic fluctuation in the gross margin percentage will indicate problems in transactions. A successful company maintains a stable margin percentage, and this needs to be considered when looking at financial statements.
• Review The Statements Line By Line In the service industry, understanding profitability of the consumer is an essential factor to take into account. Similarly, in product-based companies, it is important to understand the profitability of the production line and sales. Evidence has been found among smaller companies that unprofitable production lines or clients are being experienced without the knowledge of the manager. This type of discrepancy is apparent in financial statements, and if this happens, it is recommended prices are raised to reduce the profitability scale.
• Accountability The company manager is typically responsible for a company’s revenues and costs. For example, if the items being produced are ‘people costs’ there is a lump sum where all costs are being placed together. In this situation, there is more than one manager responsible for the portion of costs and the revenue may be obscuring performance. The financial statements can be useful for multiple accountabilities because it will help identify who is accountable and at what point accountability is reached.
• Deadlines For Financial Statements It is highly recommended that all financial statements are received within the last two weeks of each month. By doing so, the statement will remain relevant, and the value for decision-making will be reduced. Typically, people will be able to send in statements during this period or before, but it is best to estimate for statements to be received and dealt with early to avoid problems. The best solutions for business is to hired a professional bookkeeping service meaning that you will have more time to run your business.