Financial Statements are Very Overrated
May 31, 2013
Smart business owners don’t rely on financial statements. Instead daily flash reports help them ensure their company’s finances are on track.
Of course they are important, particularly if you’re a public company releasing quarterly earnings. Or you’re looking for a bank loan. Or if you’re thinking of selling your company. That said, as a day to day management tool, the smart business owners I know don’t rely on financial statements. In fact, most of them don’t even have financial statements. What they do have, are good financial systems that frequently and consistently provide critical data that helps them run their businesses effectively.
And they put all this information into a flash report.
The flash report is a daily thing. It’s usually put together by your bookkeeper or office manager. It’s not a very complicated process, but it must be done consistently. Sometimes it’s a manual exercise and sometimes, depending on your company’s software, an automatic printout. But when it comes right down to it, it’s a simple thing. And you should be doing this frequently. How frequently? For my ten person company I get a flash report every Monday. For other business owners, a daily or two to three times-a-week report is important. And what’s on it? A basic, one-pager of the key metrics that you are using to run your business. Like...
Cash. You need to know your cash balance. Of course it will fluctuate, but there is a certain level you don’t want it to fall below. And you know what that is, right? If you don’t, you should. I like to make sure my cash is at least the level of my open accounts payable. It leaves me a cushion.
- Accounts receivable. Similar to cash, accounts receivable is one of the most important metrics to track as a business owner. Some business owners I know not only want to know their total accounts receivable, but also the amounts that are due over 60 or 90 days. Some people like to see a listing of four or five customers who have significant (however you define that) balances outstanding.
- Accounts payable. Rounding out the trio of top metrics is accounts payable. You need to know the status of the money flowing out of your company on a consistent basis. And you want to keep a particular eye on how the accounts payable relates to accounts receivable. Generally, payables should be no more than half of your receivables, but this may vary depending on your business or your experience. In time, you’ll start knowing what amount of accounts payable is a comfortable amount and when the balance is getting too high. In addition, I have a few clients that ask their bookkeeper or office manager to list out the amounts that will be due on the next check run as well.
- Backorders. These are orders in-house that are to be fulfilled or shipped – a backorder may be a pending job or project as well. It’s your committed pipeline. It’s your livelihood. There’s a certain number that will give you comfort and that will cover your overhead, and a certain number that, if you fall below it, could mean trouble. Smart business people are always looking ahead. Your backorders should make you feel comfortable in the future.
- Total Hours. This is the amount of hours everyone worked last week. Maybe overtime hours too, or hours by department or location. Your payroll is the most significant line item on your financial statement. You want to make sure that your people are working at a consistent level and that productivity remains high.
- Year to date sales. Every business manager I know wants to track their company’s volume.
Which brings up another point...
These same smart managers don’t operate in a vacuum. So for every metric on your flash report there must be a prior period amount. For example, how do you know if your year-to-date sales are on track if you don’t know how you were doing the same time last year? Or how good is your backlog compared to the same period a year ago, or even last month? For every metric there must be a prior period benchmark to gauge your progress.
Depending on your type of business, there may be other key metrics that should be important to you, such as inventory levels, machine utilization, pending sales, open tickets, etc. Consider adding these metrics to your flash report too.
Sure, at the end of the month, or quarter, or year you’ll have your accountant put together a nice set of financial statements. But by the time this is done, the information will be old. Helpful, but not really relevant for what’s going on at that moment – which is why you need a flash report. Yes, it takes a little extra time to put together, but try it for a few weeks and you’ll see what you've been missing. Every smart business manager has one. Do you?