Having the right system to efficiently obtain accurate and timely financial statements and knowing how to understand your financial statements is very critical for every business owner. Many companies prepare financial statements to get a bank loan or prepare their annual income taxes, but don’t understand how to use them to manage their business operations. Accurate income statement, balance sheet and cash flow are the basic financial statements that will answer the following questions plus many, many more:
- What where your current, prior, and past month’s profits or losses?
- What was your gross margin on the company’s key products or services sold?
- What is your available cash balance?
- How much do you have invested in inventory?
- What will you receive in the future on past sales (receivables)?
- What do you still have to pay on past purchases (payables)?
- How much do you still owe on your long-term debts?
- Did you have positive cash flow from operations?
- How much did you pay down or borrow on your long-term debts?
- Did you receive capital contributions or make distributions?
- Are we operating efficiently?
Running a business without accurate financial statements is like making a cake without a recipe or building a house without a blueprint. All can be done, but in the end will you have anything of value, and will you know how to reproduce it to make future profits? More importantly:
How Are You Measuring Critical Company Metrics?
Management reports are reports developed to help management make the decisions that increase net worth for the company that yield a good return for its investors. These reports can be developed to determine:
- Which employees are profitable to the company, and which may need to be replaced;
- Which projects are profitable and being completed within your customers’ expectations;
- If employee incentives growing or shrinking the company’s profit;
- Which products, divisions, or regions are contributing to the growth of the company;
- If your performance, financing, and liquidity ratios healthy and comparable in your industry.
Management reports are the proprietary strategy of the company. They are designed to figure out what the correct “levers and pulleys” are that drive profits which can increase equity for the investors and be competitive in your industry.