I really wanted to give you information to help you day-to-day, week-to-week and month-to-month, so you can monitor and make sense of your financial results. But whichever way I look at it I find it difficult to provide you with the complete ‘know how’ in a simple accounting101 blog post.
Making sense of your financial data is pretty much what we do as accountants and we’ve been specially trained over many years to build up the knowledge needed. I believe I’d be doing you a great disservice if I tried to explain that in a simple blog post. We use many different ratios to extract meaning from your data and they are really only useful when you can assess them with a strong accounting background.
However, I can provide you with the steps you can take to make sense of your financial results.
Step 1 | Capture data effectively
You’ve heard the statement ‘garbage in, garbage out’, well that is the system you create unless you make sure that all the data you capture in your bookkeeping software is accurately entered. The best way to overcome this is to use a qualified bookkeeper that works in closely with your accountant, even better is working with a bookkeeper that is recommended by another business owner or your accountant! If you are unsure of the quality of your bookkeeping perhaps have your accountant have a look over it and give you some feedback. It is better to know earlier than later if there are problems.
Common bookkeeping mistakes:
- Claiming GST without valid tax invoices
- Claiming GST without realising that your supplier is not registered for GST
- Claiming GST credits for full amount of purchase when goods are used partially for private purposes
- Short-changing yourself by not claiming valid GST tax deductions
- Not keeping accurate GST records
- Using computer software too complicated for your level of accounting expertise
- Not invoicing quickly and letting overdue debtors fall through the cracks
- Paying incorrect employee super contributions
- Failing to check records with the bank to ensure accuracy
- Failing to keep back-up records
- Using the wrong accounting method
- Combining personal and business finances
- Not performing basic account reconciliation
Step 2 | Reconcile and check captured data accurately and regularly
Reconciling your accounting software with your bank accounts allows you to pick up errors, duplications and/or emissions. If you leave this too long it becomes more difficult to find errors and can take longer to reconcile overall. You will also be flying financially blind.
All of your bookkeeping software will have a reconciliation function. Some make it super simple. Of course things can get tricky. If you are not a bookkeeper or accountant make sure you get advice on how to proceed rather than winging it. Issues that come back and bite generally come back and bite in a time consuming and expensive way.
Step 3 | Read and understand what historical data means
When you have accurate data to rely on and regular reconciliations occurring, you, as the business owner, can start to extract reports regularly and review your results. Your most common financial reports that you should be reviewing regularly include the profit and loss statement, balance sheet and cash flow statement.
Profit and loss statement
A profit and loss statement, also known as a statement of financial performance or an income statement, measures the profit and loss of a business over time. It reflects the past performance of a business over a month, quarter or a year. The statement subtracts the expenses from income incurred during the period and provides the overall figure of profit or loss for the business at the end of that period.
A balance sheet, also known as a statement of financial position, provides the value of a business at a particular point in time. The statement includes the value of what the business owns (assets) and owes (liabilities) and provides the difference as the value of the owner’s equity (or net worth of the business) at a specific point in time.
The balance sheet is often used to report financial position to banks and investors. It is also to determine liquidity of a business.
Cash flow statement
This statement focuses on the sources and uses of cash through operating, investing and financing activities. It does not include any future incoming or outgoing cash, unlike the profit and loss and balance sheets that also include sales made on credit.
This statement provides an overview of where money is coming from and how it is being spent.
Are you regularly reviewing these financial reports? Do you understand what they mean for your business?
Step 4 | Compare your actuals with your forecasting system and understand what happened and what is going to happen in the future
So not only do you need to have your accounting software to capture what has happened, you also need to forecast what you hope to achieve. Unfortunately it is still a bit of a rare occurrence for small businesses to have their financial plan and business plans, or a forecasting component of their accounting software up to date, but it is necessary. How can you get where you want to go if you don’t have the know-how to get there?
Check your actuals from step 3 against your forecasted figures. How did you go versus how you thought you would go?
The analysis and decision making you do on your financial data needs to be 100% correct otherwise you could be leading yourself and your business off a cliff.
We love numbers and we are specially trained to make good sense of them. I’ve also had over 20 years experience providing financial advice as a commercial and public practice accountant and building businesses in the finance, imports, food and beverage and leisure industries. Making sense of numbers and relating that to the real business world is my specialty.
As much as I’d love to give you the tips and tricks to help you make sense of your figures yourself I’m not confident that would put you on the best path. But catching up with you monthly or quarterly I’d have 100% confidence that I can put you on the right track.
If you are a new client why not take us up on our free 30-minute consultation? If you are a current client just give us a call or send us an email to review your options. Love to see what we can do to help you move forward with confidence.