Planning and control are the two most important ingredients for a successful business. A business plan takes most of the guesswork out of business strategy and control through sound financial analysis. Financial data provides a way of measuring where you are in your Strategic Plan, telling you where changes to your Plan are needed. Because of this, financial data analysis and management are vitally important to running a successful business.
It is extremely important to have a proper Accounting System installed throughout your company to make data acquisition easy. You cannot manage your Business for Profitability without a good Accounting System. My CPA has a bookkeeper come to the business to help set up the Accounting System and show us how to make it work. All of this is done with the guidance of the CPA but at a fraction of the cost. A good bookkeeper is invaluable in helping to capture financial data. Having a working Accounting System in place will minimize the fees a CPA charges to analyze your tax liability and prepare your tax returns.
An accounting system is typically built around the following key financial management tools:
– Income Statement (Profit and Loss Statement)
– Cash flow statement
– Balance sheet
– Budget
– Analysis break-even point
By having a financial management system in place, you can easily identify early warning signs or spot particularly profitable areas. Not having a system in place to analyze and organize financial data makes it impossible to effectively manage, grow, and control a business. It makes it impossible to measure the success (or lack thereof) of your Planning and Strategy. Furthermore, if misused, inaccurate financial data can be disastrous for a company’s livelihood.
An Accounting and Financial Management System is as useful as it is used systematically throughout the company. It is extremely important to implement the system into the very fabric of the business and to use it consistently. The Accounting System is a reflection of the health, or lack of it, of a company and from which business decisions are made. Make sure you set it up correctly, train your people, and most importantly, use it!
Two main objectives of any business are to be Profitable and have Cash Flow to pay the obligations. The Income Statement and the Cash Flow Statement occupy a prominent place in this area. The income statement represents how well a business is operating, and the cash flow statement shows how well a business is managing its cash. Profit or Loss on the one hand and Liquidity on the other.
The trick is to find a good balance between Profits and Liquidity, which when not planned well, can be very difficult to maintain. Rapid growth with high profits can drain the liquidity of a business, so being profitable is no guarantee that you will stay in business. The role of the existing and projected statement of income and cash flow is to help you identify problem areas so you can plan for them effectively, such as raising more capital, infusing more capital, or obtaining financing. Additionally, these two statements help you identify areas that can be better controlled and managed, avoiding the need for additional capital and financing.
The Break-Even Analysis is based on the Cash Flow and the Profit and Loss Statement. The break-even statement and chart are extremely important because they show the volume of sales revenue required to accurately balance the sum of your fixed and variable expenses. Break-even analysis can be extremely useful when:
– Establishment of price levels for products and services
– Decide whether to buy or lease equipment/building
– Determine profit projections based on various levels of sales.
– Determine if new employees are required.
– Advance planning of finances / capital required in the future
– Make the Strategic Objectives more tangible and achievable
– Measure your company’s progress toward profit goals
The Balance Sheet records the past effects of company decisions (or lack thereof) and projects the effect of future Plans. The Balance Sheet is a record of the company’s Liquidity and Net Worth. These variables are directly affected by the Income and Cash Flow statements. The balance sheet is the financial one that is often overlooked, but very useful:
– Shows the effect of past decisions.
– Track a company’s cash liquidity position
– Records the level of owner’s capital
– Quickly show the status of the business
A budget analysis compares a company’s actual performance with projected performance on a monthly, quarterly, and annual basis. The Budget is a great tool to guard against excessive and unmitigated expenses and is closely linked to the Strategic Objectives that the company has set. Analyzing income statement and cash flow statement projections against actual performance is an excellent monitoring tool, one that can quickly address problems before they become too severe. Small oversights and errors in a Company’s Projections over time can have a disastrous effect. Budget analysis is your protection against that.
Working together, the income statement, cash flow statement, balance sheet, break-even analysis, and budget analysis provide a complete picture of current operations, liquidity, past operations, and the future viability of a company. Working through an interactive Accounting System can be a very useful tool for determining future business scenarios and analyzing past mistakes. Understanding the financial implications of your financial decisions can mean the difference between success and failure for your business. Probably the most important financial information is your cash flow statement, but understanding all of these financials and how they work together is the key to a business’s success. Projections are based on assumptions – make sure they are well thought out and as realistic as possible.