The Importance of Understanding Your Company’s Financial RecordsPat Fontana
Navigating through business operations without an understanding of your company’s financial records is like going on a journey to an unknown destination without a roadmap. Busy people often focus on the day-to-day requirements of running a business without a true understanding of where the business stands financially. It is critical for the success of your business in the short and long terms to clearly understand your company’s financial records.
Monitoring the Progress of Your Business
A regular review of your financial records will help you understand how well your business is doing. You can determine which products are selling well, which services you might need to eliminate from your offerings, and whether you need to make any other changes in your business model to be financially successful.
Reviewing year-to-date records will give you a clearer picture of trends in sales, expenses, and revenue. You will be able to see whether your business is on stable ground financially, is improving, or needs to be improved.
Making the Time to Review Records
You are busy running your business, managing your staff, and selling your product or service. You’ve hired a bookkeeper or accountant to keep your records and generate financial statements. Now you must take the time to read and understand those statements.
There are, of course, many challenges for business people who don’t think they have that kind of time or who aren’t confident in their ability to read and decipher the numbers, graphs, and charts. Even the most intelligent business people do not necessarily have an accounting mindset to be able to interpret financial figures on a report. It is critical for the success of your business, however, that you take the time to learn and to understand your financial statements.
The Story of Your Business
Your marketing efforts tell the story of your business in terms of what you have to offer customers and how you will deliver your service or products. Financial records tell the story of your business, in clear and indisputable numerical terms.
The margins listed on a financial statement will tell you how well you are managing your company’s growth. You can look at your gross profit (the difference between revenue from a product or service and the cost of providing that product or service) over a period of time to determine whether the costs are increasing, revenue is increasing, or if you are holding steady. If costs are increasing but revenue is not, for example, you may need to review the reasons and make some appropriate changes.
Your company’s financial records can help you understand the state of your cash flow. You need to know how much cash your business is generating. You can determine your cash position by comparing your operating income and sales over time to see if it is improving or going into the negative. Consistently negative cash flow numbers are a clear symptom of problems in your business that should be addressed. For example, your pricing strategy may need to shift to increase your profit levels.
In addition to monitoring the progress of your business, understanding your company’s financial records will help you prepare for the tax implications of your income and expenses. At tax time, you will need to know the sources of your income, so you can separate business from non-business receipts and taxable from non-taxable income. Identifying income and expenses properly could save you from overpaying or underpaying your taxes.
In addition, you will need to be able to support the information you include on your tax returns if they are reviewed by the Internal Revenue Service. You may be asked to explain certain figures and you will need a clear understanding of where those figures came from as well as what they mean.
Types of Financial Records
Two important financial records for your business include:
- Profit & Loss Statement or Income Statement: listing the income and expenses for your business
- Balance Sheet: showing the assets, liabilities, and equity of your business
These records will give you a clear picture of the financial health of your business during any given period of time, as well as show you historical data so you can determine whether your business is headed in a profitable direction.
CONTACT CLEAR VIEW BUSINESS SOLUTIONS FOR HELP WITH YOUR IMPORTANT FINANCIAL RECORDS
Strengthening your understanding of your income and expenses through accurate financial records is an important way to become a better business owner. Learn more about improving your business’s chances of success by contacting Clear View Business Solutions to speak to our team about our services. Give us a call at (520) 544-0177.