You are taxiing out to the runway. The pilot’s voice comes over the intercom, “Welcome aboard. For today’s flight there will be high winds and poor visibility. Expect strong turbulence.” You tighten your seatbelt and prepare for flight, but you’re not worried. You simply focus on those tropical drinks waiting at your destination.
Sitting at the start of the runway, the pilot’s voice crackles over the intercom once again, “In addition to the inclement weather, none of the plane’s instruments are functioning, please enjoy your flight.”
At this moment, how do you feel about your odds of drinking those tropical drinks?
Unfortunately, many small business owners fly through turbulent, competitive markets with very low insight into their business, mainly because their instruments are not functioning.
First, a quick review of the basic business instruments: the income statement (also called the profit and loss statement), the balance sheet, and the statement of cash flows.
An income statement measures a company’s financial performance over a specific time period by giving a summary of what the business generated in revenues and expenses through both operating and non-operating activities. It shows the net profit or loss incurred over a specific accounting period, typically over a month, quarter, or year.
Key things to watch are the direction of revenue, cost of goods sold, larger expenses, and net profits.
A balance sheet summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give managers an idea about what the company owns and owes. The balance sheet must follow the formula: Assets = liabilities + shareholders’ equity
Key things to watch out for are shrinking cash on hand or equity; ballooning accounts receivable, inventories, or accounts payable.
A statement of cash flow provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given time period.
Key things to watch out for are excessive capital expenses, large cash flows outside of operations, and the direction of the cash.
So, are the instruments in your business’ cockpit broken? They are if you cannot access relevant information in a timely fashion.
For example, a business owner who has their CPA tell them once a year at tax time whether their business was profitable or not is like finding out the history of your altitude after you crashed. The information is not timely and is irrelevant in regards to decision making.
Here is how to fix your broken instruments.
Learn how these instruments function by taking some accounting classes or reading online. It is important to understand bookkeeping and double-entry accounting. Another important topic is accrual basis accounting built on the matching principle. A pilot not only knows what an altitude number means, but also how an altimeter works.
Commit the resources for setting up, cleaning, and maintaining your books. This could mean taking time daily, weekly, or monthly to reconcile and perform other necessary tasks.
Alternately, this could mean setting aside the cash to purchase accounting software or to outsource this function. Pilots spend both time and money maintaining their planes.
It is important that business owners review the instruments in their cockpit at least once a month. This will let them navigate the turbulent, competitive markets with more certainty and clarity. And if the instruments are broken, fix them rather than continuing to fly blind.
It will certainly improve the odds of drinking those tropical drinks.
To assist you with implementing accounting software, The University of Georgia SBDC offers a four-part QuickBooks series. Please call (706) 542-2762 or go to https://www.georgiasbdc.org/ for more information.
(Source: Jonathan Bohn)