Planning and control are two essential ingredients for a successful business. A business plan takes most of the guesswork out of business strategy and control through reliable financial analysis. Financial data allows you to assess where you are in your strategic plan and tell you where changes are needed in your plan. For this reason, analyzing and managing financial data is vital to running a successful business.
It is extremely important that your business has a suitable accounting system in place to facilitate data collection. You cannot run your business for profitability without a good accounting system. My CPA has an accountant who comes into the business to help set up the accounting system and show us how to work with it. All of this is done under the guidance of a CPA, but for a small fee. A good accountant is invaluable for collecting financial data. Having an established accounting system in place will minimize the fees the CPA charges for analyzing your tax liabilities and preparing tax returns.
The accounting system is usually built on the following key financial management tools:
– Profit and Loss Statement (Profit and Loss Statement)
– About cash flow
– Balance sheet
– Break-even analysis
With a financial management system in place, you can easily spot early warning signs or identify particularly profitable areas. The absence of a system for analyzing and organizing financial data makes it impossible to effectively manage, grow and control the business. This makes it impossible to measure the success (or lack thereof) of your Planning and Strategy. Moreover, the misuse of inaccurate financial data can have disastrous consequences for a company’s livelihood.
An accounting and financial management system is as useful as it is systematically used throughout the business. It is extremely important to integrate the system into the very structure of the business and use it systematically. The accounting system reflects the state or lack thereof in the business and on the basis of which business decisions are made. Make sure you set it up correctly, train your employees, and most importantly, use it!
The two main goals of any business are to be profitable and to have cash flow to pay off obligations. The income statement and cash flow statement figure prominently in this area. The income statement shows how well the company is doing, while the Cash Flow Statement shows how well the business is managing its cash. Profit or loss on the one hand and liquidity on the other.
The trick is to find a good balance between profit and liquidity, which, if not properly planned, can be very difficult to maintain. Rapid growth with high profits can drain the liquidity of a business, so profitability does not guarantee that you will stay in business. The role of an existing and projected cash flow and income statement is to help you identify problem areas so you can plan them effectively, such as raising more capital, injecting more capital, or getting financing. Moreover, these two statements will help you identify areas that can be better monitored and managed, avoiding the need for additional capital and funding.
The break-even analysis is based on the cash flow and income statement. The break-even report and chart are extremely important because they show you how much sales revenue you need to accurately balance your fixed and variable costs. Break-even analysis can be extremely useful when:
– Setting price levels for products and services
– Making a decision to buy or rent equipment / building
– Calculation of profit forecasts based on different sales levels
– Determining if new employees are required
– Advance planning of financing / capital needed in the future
– Make strategic goals more tangible and achievable
– Measuring your company’s progress towards profit goals
The balance sheet records the past consequences of the company’s decisions (or lack thereof) and predicts the impact of future plans. The balance sheet is a record of the liquidity and equity of a company. These variables are directly affected by statements of income and cash flows. The balance sheet is often overlooked, but it has a lot of usefulness:
– Shows the impact of past decisions
– Tracks the liquidity position of the company’s cash
– Records the level of equity
– Quickly shows the state of the business
Budget analysis compares a company’s actual performance against forecast on a monthly, quarterly, and annual basis. A budget is a great tool to protect against excessive, unlimited spending, and is closely tied to the strategic goals that the company has set. Comparing the projections of the income statement and cash flow statement with actual figures is a great control tool that allows you to quickly resolve problems before they become too serious. Small omissions and errors in a company’s forecasts that spread over time can be disastrous. Budget analysis is your defense against this.
Working together, the Income Statement, Cash Flow Statement, Balance Sheet, Break-Even Analysis and Budget Analysis provide a complete view of current operations, liquidity, past operations and the future viability of the company. Working with an online accounting system can be a very useful tool for identifying future business scenarios and analyzing past mistakes. Understanding the financial implications of your financial decisions can mean the difference between the success and failure of your company. Probably the most important financial statement is the cash flow statement, but understanding all of these financial metrics and how they work together is key to a company’s success. Forecasts are based on assumptions – make sure they are well thought out and as realistic as possible.