Have you ever tried to drive somewhere new without a map or directions?  If you have a good sense of direction you might get lucky and end up in the right place.  However, you can also go the wrong direction and end up somewhere completely different than your intended destination.  Driving your business without financial statements is the same as driving without a map!  

Financial statements contain the data and information needed to steer your business.  It is essential that the information is both timely and accurate so that as an owner you can make effective decisions with all of the facts.

What are financial statements? 

Financial statements are financial reports that summarize a company or individual's financial position, financial performance and cash flows.  They provide both the income statement which summarizes revenue and expenses over a period of time (usually monthly) as well as the balance sheet which shows assets, liabilities and equity at a point in time.  A cashflow report is also essential - cash and profit are not the same things! More on this below.

What is the objective of your business?

 Knowing your objective is essential to creating the detail required.  An income statement can be a single page, or it can be hundreds of pages.    If you want to summarize your financial performance, then a single page will suffice. However, if you need detail on the financial effects of any changes in business strategy that may have occurred during the year (such as expanding into new markets or diversifying product lines), then more detail is required.

There is no one size fits all financial statements structure!  It really depends on what information and data you require for making decisions about your company's long-term and short-term objectives. 

Cost - Benefit - Time

When making decisions on the detail required there are three main factors to analyze.

Cost

Additional detail typically has an additional cost - whether you have a bookkeeping team, or you are posting yourself there is typically a cost to adding more data.  To minimize additional costs procedures, processes, and systems must be in place to ensure that posting is completed correctly and that reports are automatically created with the detail you need.

Benefit

Just because you can, doesn't mean you should - What is the benefit of a change to your statements?  Just because you can break things down to the smallest detail doesn't mean that it offers your business a benefit.  Be sure to keep your five-year goals in mind when analyzing benefits.  

Time

If the information you produce takes too long it is no longer useful - imagine you are on that road trip (the one with no map) and after twenty wrong turns you finally stumble upon your destination.  Just as you arrive - a friend hands you a map and says "Oh hey, this might be helpful".  Even if your reporting has great benefit if it cannot be produced when needed - its usefulness is diminished.

Cash is King

Did you know that one of the most likely businesses to run out of cash is a successful business with massive growth?   Cash is king and cash flow reports can help you avoid financial disaster. 

What's the difference between profit and cash? Profit is when your revenue exceeds your expenses.  Cash is your liquid and available funds.  If you offer payment terms you often have purchased the materials, paid the labour cost, and covered the overhead before your payment is received.  Even if a project is profitable it can be days, weeks, or even months before you receive the payment.  

A detailed cash flow statement ensures you know where your money is, and how it is working for you.

The Magic of Detail

There is no one-size-fits-all recommendation when it comes to the details of a financial statement.  Even more so, the ideal set up for your business cannot be summarized in a single blog post.  However,  there are a few key considerations to be aware of when deciding on financial reporting detail.

Think of your business as a collection of building blocks.  Some blocks are the same, some are different.  If you sell three products (or services, etc) you would have three different styles of blocks.

Now stack five of each block on top of each other - the towers will be different sizes.  The height of each tower is reflective of the overall contribution to the business.

Now, in the course of a month your business may sell 10 of one thing, and 0 of another.  Think of each month as its own unique block tower.  Each sale, a new block is added.  Some months - an amazing tower is built.  Other months - the tower is weak and wobbly.

Your financial statements must have enough detail to know which blocks are good for business, and which blocks are not.

What is Next?

Ready to create the financial statements you need to drive your business to success?  There are many options...

• Done-FOR-You services ensure you get your reports on time, every time, without any stress; 

• Done-WITH-You services coach and guide you so that you can create your own statements;

• Training and education can provide you with the skills you need to run the accounting portion of your business with confidence.

Ready to discuss the next steps?  You can set up a complimentary consultation call to discuss the best option for you and your business.  BOOK NOW!