Are Financial Statements Important for Small Business?
"Good accounting won't make your business, but poor
accounting can break it!"
Accurate and timely accounting reports are vital to the
success of a business. An accounting
system should allow the business owner to see which customers or products are
most profitable for their business. Which
customers are overdue, what bills need to be paid, and exactly what your cash
balance is at any time can be answered in minutes with a well-maintained accounting
You may find accounting confusing, even a bit
"scary." If so, you’re not
alone. Some accounting terms are used in
different ways, and sometimes several words are used to describe the same
thing. Too many business owners are
convinced they'll never understand accounting and consequently decide that once
they hire someone to do it, they won't
have to think about accounting ever again. This is a serious mistake, because an
understanding of accounting basics is a necessity for every business owner. These basics are not that difficult to grasp
once you realize that accounting is merely a way to collect key information
about your business.
Why Are Financial Statements Important for
of adequate recordkeeping is a major cause of business failure. A recent study highlights the importance of
accounting records to the health of a small business. The study found that over half of the businesses
that lose their accounting records due to fire or computer failure ended up
filing for bankruptcy within a year. With
proper precautions, tragedies such as these can be avoided.
you don't understand it, you can't manage it. Many business owners view their accounting as
a "necessary evil." What
business owners don't understand is that good financial statements raise
questions that will help them increase profits!
In order to use financial
statements to increase profits, the business owner must be able to understand
the information they provide. Well-prepared
- Provide the opportunity to
identify trends early on
- Ensure that the company is on
track to reach its goals
- Identify and concentrate on the
company's most profitable products, customers, and employees
allow you to make informed business decisions. Running any business requires a multitude of
decisions. Financial statements provide the
essential information that is needed to do so. That's why you need to understand and
appreciate the importance of the information your financial statements contain.
It's smart to ask an accountant for
advice, but ultimately you must make the decisions. You should never place the future of your business
in someone else's hands.
with good accounting records are less likely to overpay their taxes! Believe it or not, most sole proprietors lose
out on deductions because they forget to write them down. Avoid that by knowing ahead of time which
items are deductible in your business and saving every piece of paper that supports
any expenses. The amount of taxes saved
by having good accounting records usually offsets the cost of maintaining
accurate accounting records.
work with blinders on! Compare your
financial results against competitors and with prior years’ results. One set of financial statements alone can tell
you very little. Analyzing several years’
results allows you to easily recognize problem areas. Why are sales down? Why are sales up but gross profit down? Why are we spending twice as much on
insurance? Why hasn't this customer
purchased as much from us this year? Why
are sales down in this product?
The answers to these questions enable
you to react quickly to changes in the business environment. Without good accounting records, a business
owner may not spot a trend until it is too late.
Comparing your business against
other companies in the same industry is a good way to know how well you are
doing. If an average company is able to
make twice the profit you do, you should ask yourself what they are doing
differently. How can you duplicate or exceed
additional protection against fraud.
Good accounting records are critical for detecting and controlling
fraud. If you don't have financial
controls in place, it's not a question of whether people will steal from you, but
when. Good accounting records help you
control cash, inventory, equipment, and anything else of value to the company.
accounting programs eliminate excuses for not having good accounting records.
A good accounting program should be
simple enough for the owner to learn, understand, and use. It should provide all of the following basic
- Sales control
- Bank control
- Purchases control
- Payroll control
- Expense analysis and coding
In a later blog article we will discuss the different
types of financial statements and why you should be familiar with, but not
intimidated by them.
A common complaint I hear from business owners is that they
spend all day answering their employees’ questions or correcting their errors. If a business owner is really dedicated to
using their time to massively increase sales and profits, they must eliminate
The best way to accomplish this is by documenting the core business
systems that you use to deliver your product or service to your customer. Yes, this is a lot of work. So why bother?
Let’s face it: Your
business has systems now. In fact,
without documented systems, every employee is using their own system of how to
get the work done. This means that a
customer is likely to receive a different experience every time they come into
So: Do you
want to design your systems and the resulting customer experience, or do you
want to leave this up to your employees?
A second big reason to use systems is that it makes it
easier to train and manage your employees. Training is easy. Just hand a new employee the system manual
and make sure they learn it. A better
way is to use your computer to record your instructions along with screen shots
of your computer or a video camera with you showing how the job should be
performed. These can easily be uploaded
to your private You Tube channel and shared with your staff.
Now, you are not managing the employee, but rather
managing the system. For us, putting
a tax return together is a documented system that every employee who assembles
a tax return uses. All I have to do when
I sign a return is review that the system was followed. If I find an error, there is no argument, because I have communicated in advance what
the process is and what the results should be.
System Can Be Improved
You must believe that every system can be improved in order
to willingly do all of the work required to document your systems. You must truly understand and believe that there
are real benefits to doing so. Even if
all of your systems are several times more effective than those of your
competitors, you can be assured that there are still improvements that can be
Do You Start
Start by reading the full article in ISB Mag! Innovative Small Business Magazine is available on iTunes newsstand. It has a lot of profitable ideas that you can use in any industry!
This publication is designed to provide accurate and authoritative information regarding the subject matter covered.It is distributed with the understanding that the publisher is not engaged in rendering legal or financial services.If you require such advice, please seek the services of an attorney, CPA or a financial professional.We are only responsible for advice in written form that is a result of a fact finding meeting in regards to your particular situation.