Did you know that within your boring financial statements are five hidden secrets that could have a significant impact on your business? Some of my most successful clients have figured this out. By understanding these things, they’re better able to manage their cash flow and interpret the numbers necessary to make profitable decisions.
So what are these five secrets?
Secret 1: “Flash Reports” are more valuable than financial statements.
As a CPA, I’m used to being referred to as the “mortician of numbers.” That’s because we’re always looking behind. Financial statements, by the time they’re prepared, reviewed and blessed, are almost always out of date. My smartest clients read their financial statements regularly and look for trends and anomalies, but they’re always making business decisions based on real live data. And that data usually comes from a “flash report.”
A flash report has — daily or at most weekly — key metrics that put the business owner’s thumb on the pulse of his or her business. It has daily cash balances, open accounts receivable amounts, year-to-date sales, and upcoming orders. It’s the key metrics you need to really know what’s going on right now to help you make decisions for the future. These metrics are always compared to prior amounts for a benchmark. The report is easily compiled by an administrative person. When used the right way, you’ll find your flash report to be much more valuable than your financial statements.
Secret 2: Cash isn’t what it seems.
When you see your cash balance on your bank statement, don’t kid yourself into believing that it’s the actual amount of cash in the bank. That’s because cash isn’t what it seems. Your bank doesn’t know what cash is coming in or what payments are still in process. So when you see your bank balance, it’s always out of date.
So is your book balance. That’s the balance showing on your financials. This cash balance may not be what you think either. For it to be real, it needs to be reconciled, so make sure you have someone outside your company reconciling your book balance to your bank balance every month. There will be timing differences and other items that someone may have missed. It happens all the time. Cash can be a tricky thing — make sure you completely understand why your book and bank balances don’t agree.
Secret 3: Your real business is in your general ledger.
Ever read your general ledger? You should. Because it’s only in the general ledger where you will find the true details about your business. And, like my grandmother used to say, the devil’s always in the details! The general ledger is the underlying “diary” of your business. It’s here where every transaction is recorded. It’s here where you will see every single thing impacting your company’s cash flow. Your financial statements are merely a summary of what’s in your general ledger. Your general ledger has all the juicy info.
So once a month, print out your general ledger (maybe it’s 30 pages) and go through it manually with a pen. Seriously. Circle items that you don’t recognize or look unusual. Ask your accountant about them. You’ll almost always get a reasonable answer. But your eyes will be open to the type of things that you’re spending money on, as well as the people you’re doing business with — both customers and suppliers. Once you know your general ledger, you’ll really know your business.
Secret 4: Projections are more valuable than your financial statements.
As I wrote above, your financial statements give you insight into the past. That’s interesting. But what’s more important is the future. My successful clients are always looking ahead. So while they do read their financials to better understand their businesses, they’re leveraging that past data to build forecasts so that they can see what’s coming.
And doing this isn’t so tough. Just take your year-to-date financial statements, put them on a spreadsheet, and figure out the next 90 days ahead. Knowing your expenses shouldn’t be too hard. Payroll, utilities, rent, maintenance — most of this stuff is the same. Your margins can be estimated (a forecast is not an exact science). What’s challenging is figuring out your sales. But you can do this using past data, pipelines, open orders, and discussions with your sales team. Again, it’s only 90 days into the future.
Once you have a reliable process for putting together regular forecasts, you can get the best of both worlds: using your past financial statement info to generate predictions for the future.
Secret 5: You don’t need an audit, but you should get a review.
Consider bringing in a certified public accountant to look at your numbers. If you have a good CPA (you can find a firm through your state CPA society or a good referral), then you’ll have the advantage of someone with a financial background digging into your numbers, comparing you to other companies in your industry, and pointing out items of note.
CPAs do compilations, reviews, and audits. Unless you’ve got outside investors or lenders, you generally won’t need a review or audit. Professional standards require CPAs not to offer any opinion on a “compiled” financial statement, where they’re basically taking your internal records, like your general ledger, and creating financials for you. But good CPAs will still offer advice, recommendations, and counsel based on what they see, even with a simple compilation. That kind of guidance is critical and can go a long way in helping you better manage your business – and understanding your financial statements.
In summary, your financial statements hold some secrets. These secrets aren’t known or used very much by most business owners. But my savviest clients know them. They know to use flash reports, read their general ledger, reconcile their cash, create projections, and lean on outside help from a CPA. They do this to unlock all the value that financial statements can provide.
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