You do not need to be an accountant or CPA to understand the financial performance of your company. You only need to understand what the financial of your company are telling you, not the debits and credits that went into making them or the accounting regs like GAAP or FASB. You need to be able to easily determine what P&L, balance sheet and cash flow statements are telling you about how well your company is doing and alert you to problems. The P&L should tell you how to manage your company and this is best done on an accrual basis, your balance sheet should tell you about the financial condition of your business and cash flow should convert accrual accounting into actual cash. All three of these things should be done on a regular basis so that you can see trends and compare your results to prior periods and a budget. They should be done on a timely basis so that you can take action as quickly and not as post mortem, so that it is too late for you to take corrective action.
You should never be intimidated by those doing your books where these simple things are confusing and hard to understand. You need to cut through all the accounting jargon to get to the answers you need to run your business effectively. Your financial statement should be clear enough so that you understand if you are making the profit you should be and what the levers are that you can pull to change things. The same goes for the financial health of the company and its ability to through off cash. Your financial statements should be reduced to clearly highlighting major items and not so many minor accounts that you get lost in the detail of what really is happening and important.
Let’s look at some fundamental. Accrual accounting is used to manage your business as opposed to cash accounting that you can get from looking at your checkbook. Accrual accounting matches revenue with the costs that they are related to you can look as cause and affect. If this is done right you can determine things like your margin rates, fixed cost, profit as a percent of sales and return and see how these are trending over time. Cash based accounting may mismatch cost and revenue and give you a misleading picture of what is happening. For example, you may have a large invoice that if booked to the P&L in a given month as opposed to paying it and accruing for in on the balance sheet and the relieving that expense to the P&L over the time frame that that expense was related to it might appear that you were erroneously doing poorly. Let’s say you are having a year and you were going to reward your staff with an expensive perk like a trip or Christmas party this should be accrued each month instead of expensing it all in one month. There are many similar events that come up and one should provide for them whenever possible in your accounting policies and procedures.
We welcome your questions as to the challenges you face in order to grow.
To see all articles in this series please go to http://optimal-mgt.com/blog.
