Small Business Savvy: Tips for Improved Financial Management

By Teryn Grater, an EO San Antonio member and partner at ATKG, LLP

Accounting and the subsequent financial statements that come from it are some of the most underutilized resources business owners have at their fingertips. A common mistake for small businesses is to only use accounting and financial statements as tax-reporting and -compliance tools.

The fact that the IRS requires them (or heaven forbid, actually comes knocking), is a very motivating factor for most businesses. The problem is that if used only in this way, the information is normally prepared the following year, and in my experience, is rarely looked at again.

Yet, if used timely, financial statements can be one of the best investments you ever make. The investment comes when you invest in accounting people and resources, whether internal or external. It can be costly, especially when you are just starting up, but it gives you the information that enables you to grow faster, make more money or lose less money.

Unfortunately, business owners tend to not invest because they think they can’t afford it. I would argue that you can’t afford not to, really. If you have to prepare financial statements a to file your tax return anyway, why not do it timely and use them to run your business more profitably? Here are some tips for preparing and using your financial statements:

• Look at your income statement monthly. Look at your expenses as a percentage of sales. Start to see norms, trends and extraordinary items. Compare this month to the same month last year. Compare this quarter to the same quarter last year. Most software can run these reports in a matter of seconds.
• Determine if you need to have divisions or classes. Wouldn’t it be great if you knew that one division made 120% of your profit and another one lost 20%? You could close down a division or location, have fewer hassles and make more money!
• Don’t ignore your balance sheet. It’s a critical financial statement. If accounts receivable is misstated because you haven’t written off your bad debts, then your income statement is wrong and you might be making bad management decisions.
• Set targets or key indicators. Create a dashboard with which you can monitor your business. These will vary depending on your industry. Make it simple and meaningful. You should be able to figure out five things that make or break your business– monitor them.
• Set solid financial internal control procedures. If you do have control issues that are costing you money, by reviewing your financials timely you will more quickly identify these issues, stop the bleeding and lose less money.
• Cash is king! You can have the best ideas in the world, but if you don’t have working capital to survive, you may never get those ideas to market. One of the most important things you can do is invest in the management of your receivables. What is the point of having a great sale if your customer doesn’t pay?
• Understand your cash flow cycles. In doing so, you can plan for them and greatly reduce your stress levels. How long does it take for you to collect receivables versus the time allotted to pay your bills? How will you fund that spread? Most small business owners underestimate (by a lot!) the amount of money they need to get up and running. In a growing, successful company, cash is even tighter than in a declining company– contrary to popular belief!
• Consider sharing financial information with your employees or key management team. Imagine what they can do with real information and data! Studies have shown that the assumptions employees and managers make about the business are almost always far from reality!
• If you’re trying to get funding from a bank or investor, it is critical that you have good financial statements. Never give out financials that are not correct to a third party (bank, buyer, vendor, etc.).  Make sure that what you are saying is reality; it will increase the level of trust they have in you and speed up whatever you are trying to accomplish.

Get as much value as you can out of something the IRS is making you do anyway. Move up the accounting and make it part of your monthly management process. It will pay dividends!