Typically the first question g2G receives related to financial reporting is; “How should I set up my financial system so it best supports my business?”
There are many correct answers to that question. Here are some of the primary considerations.
Industry Standards – If your industry has established accounting standards – USE THEM! If you use these industry specific principles you won’t have to worry about setting your chart of accounts, accounting conventions and it is highly likely there is a computer system that already has this set up and ready to use.
More importantly, if you take this approach, you will likely find there are operating standards that you can use as a basis for financial planning, performance monitoring and talking with your banker. As an example, the auto industry all use similar accounting conventions but offer operating guidelines at different levels, based on your business. Each Manufacturer has created standards for their dealers, the National Dealer Association (NADA) has done the same for all dealers, regardless of brands carried, SEMA for the Specialty Aftermarket business, and Business Operator “20 Groups” refine it even further usually grouping similar sized, non-competing operators.
These external benchmarks are important to improving your business as they can be used to identify trends or opportunity areas where your business is not performing at the same level as other similar businesses. g2G clients have benefited greatly from this approach.
Accounting Methods – The primary discussion is whether to use cash or accrual accounting. For many years the rule of thumb has been smaller businesses use cash accounting and larger businesses, over $1,000,000 gross sales, use the accrual method. However, in today’s automated world these lines are blurred as the business management systems have put accrual accounting in easy reach for even the smallest operators. Review this with your accountant and / or software provider.
Personally, I favor accrual accounting for its greater accuracy. This accuracy gives you better performance and decision making information. And, let’s face it, if you use this information correctly, you’ll be a large business soon enough anyway.
Reporting Frequency – If you view financial reporting as “an evil that has to be done for tax reporting purposes” you are missing the real power a good financial statement will bring to your business. g2G will show you how to read your financial statement from a business point of view.
At a minimum, you must create an income statement and balance sheet monthly. If you wait until the end of the quarter or end of the year, you are leaving money on the table and you likely won’t see trouble until it’s too late.
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