One of the most overlooked practices in small business administration is the regular use of financial statements. It is a good practice to produce monthly income statements and quarterly balance sheets in order to review and monitor the performance of any business. Just like checking your speed, engine temperature and gas levels periodically and sending your car to the shop every three months or 10 thousand miles for service, you must also routinely practice routine business maintenance to ensure longevity by generating monthly income statements and quarterly balance sheets.
Income statements provide a snap-shot of what profit/loss was incurred in a one month period through a structured chart of accounts. While it seems like a lot of work, it’s actually relatively simple and quick to prepare once you get used to doing it and have a template to work from. It’s important because it allows you to foresee future financial opportunities or troubles. It allows you to monitor your business’ performance. It’s especially helpful to accurately track monthly expenses. This simple, routine practice provides current information, at your fingertips, by which you can make informed decisions pertaining to the operation of the business.
Too often, small business owners don’t know about or overlook this practice. Instead, they submit their invoices and piles of sales receipts to a book keeper. Once in a while, perhaps quarterly or annually, the book keeper presents a report of the business cumulative revenue and cumulative expenses. I have seen reports that do not even include chart of accounts or categories. These kind of reports are sometimes too late and too poorly structured that they are not very helpful to the small business owner in making good business decisions or correcting business practices in a timely manner. Sometimes the mere fact that you’re sending everything off to an accountant leads you to believe that you, therefore, have non need to worry about “the financials”. There is no substitute for data that is timely, accurate and consistent and nobody cares more about the intricacies of the financial success of your business that you, the owner.
Perhaps the most common obstacle that deters keeping accurate monthly income statements is the happy circumstance in which the owner of the small business is pleased with the flow of cash. He or she is sure that since all things appear to be going well and it seems like their making money, why bother accounting practices or shuffling paper unnecessarily? Sometimes appearances can be deceiving. While you may have had a particularly good few weeks in generating cash flow, if you are not precisely aware of the expenses that are, at the same time allowing for that cash to flow out to pay expenses, it’s easy to be overly optimistic and, later, shocked, when you see the actual numbers.
Another common barrier to the routine maintenance of generating monthly income statements is the myth that “it takes a business takes 3 to 5 years to make money”. Wrong! A business needs to make money the first month, and the second month and the third, and so on in order to pay operating expenses or start up loans. To make money over time, you should make money every month. If not, you can consult your monthly income statements to help you assess why not and create an action plan for the next month.