For successful companies, timely and accurate financial statements are the cornerstone of sound financial management. While the information is historical, it provides information critical to the management of any business. The power of these numbers comes alive through meaningful comparisons and analysis. Yet there are many business owners and operators who miss the opportunity to manage their businesses because of their belief in certain myths. Here are a few truths behind the misconceptions.
Myth #1: Financial statements are just history; I manage my business forward. The banks and tax accountants can use the financials but they aren’t much use to me.
Any business owner who thinks like this doesn’t understand the constant loop between financials and the budgeting process. Budgets need to be dynamic, adjusting to changes in goals or results. Planning means understanding how your business will reach these goals.
Your historical financial statements must be the bedrock on which your budget/plan is built. While you can prepare your budget independently from the prior year’s financials, it’s important to bridge the information back, define differences and consistencies, and plan accordingly.
It’s also important to understand that budgets are worthless without results for comparisons. Comparing actual results to budgets will tell you where you’ve over-performed or under-performed, where you have opportunities or unexpected superior results. Analyzing this information will help you incorporate the appropriate standard procedures into your business and show you where you need to make repairs.
If you don’t take the time to compare budget plans to monthly financials, you are letting opportunity pass you by.
Look at your financial statements as an ongoing process to monitor, manage, and improve your business. This will help you get a step up on the competition and propel your business into the future.
Next time we will look at Financial Statement Myth #2:I don’t understand the financials, therefore I don’t have any need for them.