Financial Reporting: A View Inside Your Business
The ultimate goal of running a small business is coming away with a profit on a consistent basis. While this may seem as simple and as direct a goal as any, it is in fact quite more nuanced. The goal of profitability is not a straightforward one, the path to get there is winding, treacherous and taxing, a labyrinth full of obstacles a company must understand and navigate to see cash in a positive after all is said and done.
Profitability isn’t simply cash received for goods sold, it is the end result after all debts and expenses are paid, the final reading, the last squeeze of juice left over for the owners after everyone else is paid. Net profit, take home pay, ending balance, real profits however they may be named, come at a premium and are unfortunately not as high for most businesses as they could be.
This often is a result, not of the lack of having a good product or low sales, but for expenses down the balance sheet eating away at a majority of the gross revenue coming into a business. As difficult a task as it is marketing, producing, selling and delivering a product/service, so is the ability to retain operating income as it moves through an organization.
What I’ve noticed from a lot of clients and newer businesses owners is that they are leaving so much cash on the table from when it comes in the door to when it settles after expenses, debts etc. are paid. The principal reason for this is most do not account for or list out their expenses or liabilities in an efficient or accurate manner.
A business’ financial statements are a read-out on the company’s health. Just as a person might get blood work done to understand what they need to focus on to improve their health, so goes a business balance sheet or income statements if measured accurately, to give the owners a visual on areas to target and remedy.
It is imperative that a company be aware not only of cost of goods sold or service expenses, but also the various other expenses that constitute the brand’s make up and ensure day to day operation of the company as a whole. By doing so accurately, business owners can paint a clear picture of their operations almost like a blueprint or diagram for their entire operation. They can then work on identifying areas of inefficiency, where costs are rising, how debt instruments are being used as well as repaid, and how all other operating expenses are being allocated.
What is alarming is the majority of businesses owners not only don’t have these statements drawn up or put together accurately, but most also don’t know how to read or properly assess them. If you want to build anything for longevity, let alone something as complex as a functioning corporation, you need to understand and be able to conceptualize the financial reporting aspects of the business.
How can we become more proficient in this area? Focusing on one item at a time, take an inventory of all expenses to start, subtract them from gross revenue, then allocate for debt or other payouts. Regardless of what the end number is look back and see how you could make it larger without adding in additional investment or income. This can be accomplished through slowly zooming in on each expense individually, and working on finding a way how can the cost be reduced. Or asking how an expense could be lowered (regarding debt) or conducted more efficiently. That’s how your mind should be operating always on the hunt for finding efficiency in both operation and finance. While that is a broad way to analyze a business’s accounting in a nutshell it’s important to consider making sure said reports are accurate, consulting with a finance professional or accounting expert is key, keeping your books clean and accounting for all individual expenses accurately is paramount to all of this.
An engine is only efficient and effective if its internal components are operating properly. The same holds true for a business, all financial operations need to be monitored, accounted for and refined to bring about that core efficiency which las to max profitability. If you are able to begin thinking of a company in this way, the faster it will be on the road to become a sustainable success.
To gain personalized guidance for your business on this topic and others contact us.
- Vince Calace
Founder - Venture Business Development