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What financial information do I need to responsibly manage my business?

By: Kevin Leahy

Financial management is the main way most business owners measure the success of their business and ensure they have the resources to continue operations. Lack of financial management can open the door to employee theft, overspending or higher tax costs. Borrowing is impossible without good financial records. Important financial records to maintain and understand include: financial statements (profit & loss and balance sheet); cash flow budget; bank reconciliation; accounts receivable and payable aging summary; inventory records; employee records and taxes.

Bookkeeping is the first step in good financial management. It can be done using either a manual or computerized system. Bookkeeping is an organized system for tracking all income and expense transactions. It needs to be done in a timely, accurate manner. Whether it’s done internally by employees, externally by a consultant or by the business owner, it needs to be done regularly so monthly (or quarterly) financial statements can be generated and reviewed. Financial statements provide the information needed to make important business decisions and know how profitable the business is. They are also a tool that can provide clues if employees are stealing from the business.

Projecting cash flow helps business owners plan for the future to ensure funds are available to pay all business debts, expand or make an investment in new assets. Cash flow is more important than profits. A business can be profitable and still go under because there is not enough cash to pay obligations.

Reconciling the business bank accounts on a monthly basis is critical to creating accurate bookkeeping records. Many embezzlers steal blank checks to get access to business funds. A bank reconciliation will catch out of sequence checks or ones not recorded in the business recordkeeping system. Sometimes banks make errors in recording transactions. A bank reconciliation each month will give the business owner information to correct errors quickly.

Accounts receivable are sales that are made but cash is not collected until a later time, generally within thirty days. When accounts receivable get past ninety days old, they often become uncollectable. Reviewing a monthly summary of accounts receivable allows a business owner to follow up with customers before accounts become a problem. Accounts payable are debts owed to others. It’s also important to make sure they are paid in a timely manner and any discounts allowed are being taken.

Unmanaged inventory can quickly become a problem. Obsolete inventory and inventory on the shelves too long are a waste of money. Untracked inventory can also be a place theft can occur. Reviewing inventory records allows a business owner to make adjustments and correct problems before they cost the business needed cash.

Employee records provide valuable information about the productivity of staffing levels. Too many employees and the business loses money. Too few employees and customer service levels may be negatively impacted.

All businesses are required to pay taxes; federal, state, employment, local. Good recordkeeping provides the information needed to file returns and pay the right amount of taxes. Poor recordkeeping can mean missed tax deductions and inaccurate sales reporting.

Other financial information might be helpful to monitor such as ratios (used to determine the effectiveness and liquidity in a business) and operating budgets. The most important financial information to monitor will be a decision made by each individual business owner with input from their accountant.

(Thanks to Arlene Soto, my colleague and SBDC Director at Southwest Oregon Community College for sharing the information in this article)

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