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Planning and controlling are the two most important components for a successful business. A business plan takes most of the guesswork out of business strategy and control through solid financial analysis. Financial data provides a way for you to tell where you are in your strategic planning by pointing out where changes are necessary in your plan. Because of this, financial data analysis and management are extremely important to running a successful business.
It is extremely important to have an appropriate accounting system in place throughout your business so that data acquisition is easy. You cannot manage your business profitably without a good accounting system. My CPA has a bookkeeper that comes into the business to help set up the accounting system and show us how to make it work. All of this is done under the guidance of a CPA but at a fraction of the cost. A good bookkeeper is invaluable in helping to capture financial data. Having an established working accounting system will reduce the fees charged by a CPA to analyze your tax liability and prepare your tax return.
An accounting system is typically built around the following key financial management tools:
– Income Statement (Profit and Loss Statement)
– cash flow statement
– Balance sheet
– Budget
– break even analysis
By having a financial management system in place, you can easily identify early warning signs or spot particularly profitable areas. Not having a system to analyze and organize financial data makes it impossible to effectively manage, grow and control a business. This makes it impossible to measure the success (or lack thereof) of your plan and strategy. Furthermore, used incorrectly, inaccurate financial data can be disastrous for a company’s livelihood.
An accounting and financial management system is only as useful as it is used systematically throughout the business. Implementing the system into the very fabric of the business and using it systematically is of utmost importance. The accounting system is a reflection of the health, or lack thereof, of a business and from which business decisions are made. Make sure to set it up properly, train your people on it and most importantly, use it!
The two main objectives of any business are to be profitable and to have cash flow to pay off obligations. Income statement and cash flow statement figure prominently in this area. The income statement shows how well a company is operating, and the cash flow statement shows how well a 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 leverage and liquidity, which when not planned well can be very difficult to maintain. Rapid growth with high profits can reduce a business’s liquidity, so being profitable is no guarantee that you’ll stay in business. The role of the current and projected cash flow and income statements is to help you identify problem areas so that you can effectively plan for them, such as raising more capital, applying more equity or obtaining finance. Also these two statements help you to identify the areas which can be better controlled and managed, thereby not requiring additional capital and money.
Break even analysis is based on cash flow and profit and loss statement. The breakeven statement and chart is extremely important because it shows the amount of revenue from sales that is needed to properly balance the sum of your fixed and variable expenses. Breakeven analysis can be extremely helpful when:
– Setting product and service price levels
– Deciding whether to buy or lease equipment/building
– Figuring out profit projections based on different sales levels
– Determining whether new employees are needed
– Planning ahead for finance/capital required in future
– Making strategic objectives more tangible and achievable
– Measuring your company’s progress towards profit goals
The balance sheet records the past effects of the company’s decisions (or lack thereof) and reflects the effects of future plans. The balance sheet is a record of the company’s liquidity and owner’s equity. These variables are directly affected by the income and cash flow statements. Balance Sheet is often overlooked but has great utility:
– Shows the effect of past decisions
– Monitors the cash liquidity position of the company
– Records the level of owner’s equity
– Quickly shows business status
Budget analysis compares a company’s actual performance with projected performance on a monthly, quarterly and annual basis. The budget is a great tool to guard against excessive, unbalanced spending and is closely tied to the strategic objectives set by the company. Analyzing income statement and cash flow statement projections against actual performance is an excellent control tool that can spot problems before they become too severe. Small slips and mistakes in a company’s estimates spread over time can have devastating effects. Budget analysis is your guard against this.
Working together, the income statement, cash flow statement, balance sheet, breakeven analysis and budget analysis provide a complete picture of a company’s current operations, liquidity, past operations and future viability. Working through an interactive accounting system can be a very useful tool in determining future business scenarios and analyzing past mistakes. Understanding the financial implications of your financial decisions can mean the difference between your company’s success and failure. Probably the most important financial is your cash flow statement, but understanding all of these financials and how they work together is key to a company’s success. Estimates are based on assumptions – make sure they are well thought out and as realistic as possible.
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