What could be more boring than pouring over last month’s financial reports? All you really need to do is flip quickly to the “bottom line” to see if you made money or lost money, right? After all, you hire an accountant to assemble those pages of numbers and you expect her to tell you if there is anything you should know. The banker wants financials to make loan decisions (and to monitor you if they’ve loaned you money), the accountant needs them to prepare your taxes, and potential buyers of your business want them to determine a purchase price.
Most business owners have little training in how to create, read, and use the financial reports of their business. Their eyes glaze over as they look at rows and columns of numbers that must mean something to someone, just not to them. After all, the business owner is only interested in net profit. Are you making money or losing money?
There is some truth in that perspective. Financial reports are a compilation of the accounting activities that occurred in the past. Unfortunately, they are rarely less than 2 weeks old and often much older than that. By the time the owner has the reports in hand, the damage has already been done and there is nothing that can be done to change it. Or is there?
Business owners must operate 18 to 24 months ahead of their business. Day to day management activities should be delegated, if possible, or relegated to a defined part of the owner’s day. A portion of every day should be scheduled, just like an important business meeting, for work on the company’s future. Business owners maintain control over their business and personal lives by defining where they want their business to go, setting the path to getting there, and by verifying their progress along the way.
Financial accounting is the process that prepares consistent information for users outside of your organization. The information is reported according to Generally Accepted Accounting Principles (GAAP) so that the financial performance of one organization can be fairly evaluated against the financial performance of other organizations. For most organizations, financial accounting is tax focused; it gathers and prepares financial data to be used for tax reporting and planning purposes. Rarely does it provide information the owner can use to monitor progress toward an objective.
Management accounting is the process of preparing reports for users inside of an organization to set and monitor progress toward performance targets. Using financial data in this way is the most valuable benefit of collecting and reporting the information. The business owner sets the long term objectives, determines the key performance indicators (KPI) that reflect progress toward those objectives, and then designs reports to track those indicators.
The report of KPIs is frequently referred to as a dashboard. Properly designed and produced, it is a graphical representation of data that shows trends and performance against goals. The dashboard is an efficient and effective tool to stay in control of the financial performance of the company without having to be a financial expert.
In the next article, we will talk about the way to develop a dashboard for your business. To get there, we will have to begin with a discussion of the financial reports that your accountant typically prepares. We will begin with the Balance Sheet and follow with a discussion of the Income Statement and the Statement of Cash Flows. We will then be able to talk about ratios which are at the heart of the dashboard.
© Copyright 2011 Alden Pearson, P.A. All rights reserved.