Running a business successfully involves making a myriad of decisions. But how can you, as a business owner, make informed decisions without getting financial data that is accurate and timely? The answer is: you can’t. The more comprehensive your financial information is, and the more regularly you’re getting it, the better equipped you’ll be.
So, exactly what financial information should you be getting and how often should you be getting it? This article delves into the three essential elements of any good finance team’s financial reporting. These are looking back (retrospective), projecting forward (prospective), and ad hoc reporting.
When you’re at the helm of your business, it’s crucial to know where you’ve been before deciding where you're headed. This retrospective financial data should be presented to you every month. This frequency gives you a consistent rhythm to assess your business’ health, without becoming overwhelmed by daily or weekly reports.
Here’s what business owners should expect from their finance teams monthly:
Balance Sheet: A balance sheet offers a snapshot of your business financial health, representing your assets, liabilities, and equity. It’s your first point of call as it sets the groundwork for accuracy in your Profit & Loss (P&L) report.
Profit and Loss (P&L): Your P&L statement reveals your revenue, subtracts your expenses, and presents you with the bottom-line profit (or loss). It’s a straightforward report that enables you to assess your business's performance at a glance.
Cash Flow Statement: We live by the adage ‘You can't fake cash’. Your cash flow statement indicates where your money’s come from and where it’s going. This vital report reveals if you’re generating enough cash to meet your obligations and gives you a clear picture of your operational efficiency.
KPIs: Your Key Performance Indicators (KPIs) represent your business’ vital signs. They tell you what’s working, what's not, and where improvements are needed. Your KPIs should encompass a historical dataset, allowing you to track performance trends and compare current performance against previous periods.
Budget Comparison & Projections: Firstly, a good finance team will provide you with a report comparing your budget forecasts against the actual outcomes. This comparison helps you understand what worked, what didn't, and most importantly, why. Secondly, you should also be able to compare your actual outcomes with your projections. Remember, projections are dynamic and should be reviewed and updated regularly. Comparing your outcomes to these estimates will help you gauge the accuracy of your forecasting.
While the retrospective view allows you to learn from the past, a prospective view empowers you to influence the future or to make improvements where needed.
It’s like being on a flight, where turbulence that is unexpected is quickly unsettling. But if the pilot has already informed you there’s going to be bumpy weather, the proactive communication proactively is more likely to ease your mind.
The timeline for these projections varies depending on your business type and market dynamics. Still, you should expect to receive forward-looking reports every month, ideally covering the next three to six months.
Ad hoc reports fill in the gaps between your monthly reports. These reports are typically dynamic, addressing your business’ real-time needs.
Here are three types of ad reports business owners should get their finance teams daily or weekly:
Sales Reports: Regular sales reports – either daily or weekly – help you understand your sales volume and identify trends, empowering you to react swiftly to changes in your sales environment.
Gross Profit Reports: While frequent sales reports are valuable, they don’t tell the full story. Daily gross profit reports, on the other hand, give you a much more accurate picture of your business’ health. Your gross profit is your total sales revenue minus the cost of goods sold. It’s the real meat on the bone, and the metric that you should keep a close eye on.
Gross Profit to Breakeven Comparison: Understanding your breakeven point – the point where total revenue equals total costs – is vital for financial planning. Comparing your daily gross profit to your breakeven point allows you to keep a close watch on your financial performance, enabling you to respond quickly if you see your profits dipping too close to (or below) the breakeven line.
The frequency and types of financial reports you should be receiving as a business owner are crucial for informed, strategic decision-making. Balancing a retrospective view with forward projections, and supplementing this with ad hoc reports, provides a robust financial reporting framework, and enables you to keep your finger firmly on the pulse of your business’ financial health. By ensuring you receive these reports regularly, you’ll be well-equipped to navigate your business towards a profitable future.
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