If you think reading financial reports is low down on your list of priorities in your business (after all, it’s only a report on what has already happened, right?), then think again. Financial reports are one of the most important tools that can help you make some really exciting decisions in your business. But if not done accurately (or not read properly… or at all!), it can lead to some pretty frightening consequences.
Now and then businesses, will be faced with the pivot-moment: when a big decision that can potentially have long-lasting results needs to be made with very little warning. While most business owners view bookkeeping as basic record keeping, your year-end reports can quickly and easily be converted into a tool that will help you make sound decisions, get greater control over your business, and help you make important decisions reliably throughout the year. But it relies on the accuracy of your bookkeeping.
Recently, I worked with a business where sales were being incorrectly recorded on the accounting package dashboard. Deposits for purchases were being misallocated and this was exaggerating the sales figures. It was a simple bookkeeping error but one that had a big impact.
The business owner was extremely concerned, realising they had directly relied on the dashboard to give a quick snapshot of their business. The mistake had seriously impacted the decisions they had made, including holding back on upselling, approaching new customers, understanding stock levels easily and generally thinking the business was doing better than it actually was.
“If you can’t measure it, you can’t manage it.”
Peter Drucker
The below diagram is a way of illustrating the correlation between the quality of your financial records and having certainty and effectiveness in decision-making in your business. Following the green line, you’ll see that having accurate financial records means you can easily create meaningful cashflow forecasting, which in turn allows you to make more fully informed decisions. Little effort is required for three times the result (1:3), delivering high certainty and effectiveness for the business.
Moving along the red line, the more chaotic your financial records the more meaningless your cashflow forecasting will be, leading to decisions being made by guesswork. Three times the effort will be needed to produce a result that will have very little effect on your business.
So where would you place your business in this model? How easily can you make fully informed decisions right now? If you’re not yet on the green line of accurate, meaningful and fully informed, then there are 3 things you can do to get started:
- Talk to your advisor about what you should be reconciling and reviewing every month or every quarter (don’t wait for the end of year reports!) and make sure your bookkeeper completes the information for you on time.
- Commit to regularly reading your financial reports – and I mean commit. And read. If you don’t understand anything on the financials, then ASK.
- If your gut feeling is that something isn’t right, follow this up straight away with an external advisor – someone who can objectively look at the numbers and give you advice.
While most business owners are great at what they do, understanding the numbers, data, margins and processes may not be the most exciting way to spend their time, or it may not come naturally to them. That’s why it’s important for business owners to have access to experienced professionals who know what they are doing and who can guide them through understanding how accurate financial reports can de-risk decision making in the business.
