Running a business can be a rewarding experience. Among the many enjoyable aspects, some less savory parts are vital to a successful business. Chief among those is understanding the essential workings of your company’s financial information.
It’s common for owners to focus their time and energy on the operational aspects they understand and enjoy the most, which is often the reason they’ve chosen to go into that business. Those aspects generally do not include bookkeeping and accounting functions.
Accounting information system (AIS) software (such as QuickBooks, being the most popular for small and mid-sized companies) has made the accounting/bookkeeping function much easier than the pen and paper version of the past. Information automatically follows the rules and procedures, negating the necessity of understanding the minutiae of accounting and allowing everyday users to access the results.
Understanding how to generate a few key financial statements from your AIS software coupled with a basic understanding of how to read them, you will be in a position to more effectively achieve your business philosophy. By keeping your system updated with the most current information, you can generate these statements with a couple of clicks and have a current snapshot of your company’s health without having to pay a professional to do so.
Here is a list of a few of the essential Quickbooks reports and statements and their functions:
1. Income Statement (Profit and Loss)
- Shows revenue and expenditure amounts over a period (i.e., how successfully your company performed over that period)
- Helpful in controlling overhead and other costs, which generally rise and change with continued operations
2. Balance Sheet
- Lists all assets (including claims to those assets) as well as liabilities to show a company’s financial position at a given point in time (i.e., presents a picture of what is owned and owed)
- Helpful in determining a company’s ability to repay creditors by evaluating the liquidity of listed assets
3. Accounts Receivable (AR) and Accounts Payable (AP) Aging
- AR Aging shows the owner who owes what and when it is due; AP Aging shows the same, but for what the company owes others
- Helpful in identifying which customers to contact for payment at the correct time, conversely the same for the owner. Necessary for companies who extend credit to customers
- Helpful in identifying issues with collection procedures and staying current with creditors
4. Cash Flow Statement
- Provides information about cash receipts and payments for a specified period
- Specifically reports cash effects of a company’s operating, investing, and financing activities
- As cash is a company’s most important resource, knowing exactly how much is available at a given time is paramount (positive revenue does not always mean cash in hand)
5. Budget vs. Actual
- Provides a comparison of your budgeted revenues and expenditures and where they currently stand (i.e., a forecasted Profit and Loss statement vs. a year-to-date Profit and Loss statement)
- Useful for interim review to correct company’s course to achieve period-end budgeted results
- Useful for outlining causes of variances and areas for improvement or change
While most private companies are not necessarily required to prepare formal financial statements, doing so will provide owners, analysts, clients, potential investors, and regulatory agencies with valuable information presented (through AIS software) according to Generally Accepted Accounting Principles (GAAP).
You want to be able to communicate the financial aspects of your business with your bookkeeper and accountant so they can focus on their jobs of recording and presenting your company’s financial affairs. The last thing they want to do is explain to an owner what the financial data generated by that owner (through business operations) means; they generally have multiple clients and rightly expect a certain level of financial care and understanding to be undertaken by owners.
Having the backing of your company’s financial data will allow you to make more informed decisions in a shorter amount of time. It allows you to prioritize your costs quickly, cut down on unforeseen expenditures, and prepare your company for issues that may arise in the future. All said it puts your finger on the pulse of your company’s health.
So as a business owner, do yourself, your bookkeeper, your accountant, and your clients a favor by taking the short amount of time to learn what these statements are, what they mean, and how to prepare them yourself. Your business relationships and reputation will improve, and in the end, it may be the difference between going bankrupt and making millions!