Warren Buffet says that in business, the rear view is always clearer than the windshield. Accounting looks at the rear view. It looks back at what happened last month or last year, and this is where you can source all of your important data.
Your accountant and bookkeeper put this information together. But what does that actually mean going forward? That’s what Bill Sablan of Now CFO will teach us in this blog, on using accounting to run your business.
If you have data and reports, you have insight. When we talk about visibility, we mean the ability it gives us to look ahead. How well you can predict future earnings and future expenditures. That’s how you can really guide your business down the correct path.
For example, you want to hire someone. Financial visibility will help you determine:
- Your budget for this new person
- How it will affect your cash flow
- The financial ramifications of bringing that person on: while it is an expense, it could also increase your profits
So at the heart of financial visibility is your financial data. This data must be accurate, timely, relevant and insightful. Those are the four pillars, and therefore the most important parts of the equation.
Accurate and timely: a good bookkeeper can really make that happen. They ensure that transactions are entered correctly, be that every day or every week, whichever makes the most sense for your business.
Relevant and insightful: this is really where the magic happens. This is best accomplished with management accounting, the practice of using accounting data to manage your business.
Recognize and pull key financial information from your accounting data
The point of relevant and insightful data is pulling the key information that helps you make the best business decisions. When you’re too buried in multiple pages of financial statements and balance sheets, your eyes automatically go to the bottom line: your net income. You miss a lot of important details.
So the next three steps in this blog post will help you fix mistakes and capitalize on opportunities in a timely manner before you experience loss.
Close the books on time
You always need to close your books on time. Having access to your important financial information quickly is just as important as having it be accurate.
Inaccurate data is useless, but so is delayed data. If you’re taking too long to act, you will lose the opportunity. Maybe you’re spending money that you don’t have to spend. That’s money down the drain that you could have saved or used for other business expenses.
Get relevant insights by staying timely with your cash position forecast
This is about looking forward, having a cash flow forecast. As stated in the previous blog post, not knowing your cash position is one of the critical mistakes business owners make.
The industry standard of a cash flow forecast is 13 weeks: a quarter of the year.
If you can see your cash position for each week, for the next thirteen weeks, that will really help you manage your business. You will have insight on what you can spend on both minor and major decisions, like if you can move to a new office and when, or how rent affects your cash position so you can better prepare for it.
You might even have a client generating a lot of revenue but do you have a set schedule to collect or an idea when you expect to receive their payment? If it’s not in the bank, it’s not money you can use. Cash position is only valid for cash in hand, so it only reflects and therefore affects your day to day business.
When you use your cash position forecast, you stop overdrawing from your account every single month. You’re less likely to forget important details like billing clients and paying your own bills.
You can also determine if you’re losing money.
You can’t say, “Okay, it’s fine that I’m losing money every single month because at the end I’m going to get there.” If you run out of money along the way, you’re never going to get to that next step where you start to make money.
A 13-week forecast gives you insight on changes you need to make, to stop your business from losing money in any given week. Your forecast can help you determine if you need:
- To make adjustments to your budget
- To consider pushing expenditures forward to another week to when you expect an influx of cash
- To adjust timelines of when things are in the green versus when things get dicey, so you can prevent the dicey times and keep your cash flow stable
Your cash flow forecast should be updated every single week. You should always add another week to ensure that you’re always looking thirteen weeks ahead. You can also assess and adjust it monthly. At the end of each month, add four weeks and so on.
Doing this gives you a buffer. You’ll know if you’ll be short on cash 12 weeks from now, and you can think about what you can do to fix that situation before it happens.
Glance at your financial report dashboard regularly
Budgeting is a big part of financial responsibility, and we’ll talk about this in its own blog post. The budget, cash flow, and all the key pieces are displayed in your dashboard. Not having one is a critical mistake.
Having a dashboard, but not observing it regularly, is also a big mistake.
Think about a car dashboard. You’ve got your miles per hour, your fuel level, and other indicators. When you drive, you glance at it and you’ve got all the information you need to keep you going safely down the road.
That’s the idea of a business dashboard. Your dashboard is a quick look at the overall health of your business. You spend a little time on it weekly or monthly depending on the metrics you use. But you should glance at it to check where things are. Is everything fine? If something looks a little off, you can address it in a timely manner.
Your time is valuable, and your dashboard can help you allocate it where it really matters.
Working with a CFO can be really valuable in helping you figure out what is the vital information that you need reflected in your dashboard versus what you only need to track periodically.
Many business owners often make the mistake of adding additionalinformation to their dashboard or reports. It quickly becomes cumbersome and overwhelming. Focus on what’s important. And then, just take a look at it every single week.
This is how you use accounting to run your business: determining, recording, and monitoring the important accounting data so you can make smart decisions.
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