You may think that your financial statements are some boring documents you have to look through each month. It may look like a bunch of numbers to you, but your financial statements hold four hidden secrets that could potentially have a huge impact on your business. Uncovering these four secrets can help you better manage your cash flow and interpret the contents to help you make more profitable decisions moving forward. Let’s take a look at these four hidden secrets.
Secret #1: Financial Statements vs Flash Reports
By the time you receive a financial statement, it is outdated. It takes time to prepare them and review the information before it is forwarded to you. You can use financial statements to determine trends and anomalies. But when making important decisions about your business and planning on growth, you need real-live data. That information is included in a “flash report.”
Flash reports contain key metrics that business owners can use to determine the lifeblood of their operations. These daily or weekly reports contain your business’ daily cash balance, open accounts, receivable accounts, year-to-date sales, and outstanding orders. This information lets you know the state of your business in real-time, and that’s what is needed to make decisions moving forward. Administrative personnel easily compile these reports. You’ll find it a far more valuable tool for making decisions than financial statements.
Secret #2: Disappearing Cash
When you see your financial institution’s statement, you can’t count on the cash balance. It has most certainly changed since the time the financial statement was prepared. Your bank has no clue as to what your cash flow looks like since then or what payments are pending. By the time you see the bank’s balance, it’s out of date. Your book balance and your cash balance are not always what you think. To be certain these two balance each month, you need a third party who can reconcile the two. Timing differences are too easy to miss, it happens more than you think. Cash is a tricky thing and it’s important to know why book and bank balances are not in agreement.
Secret #3: Your General Ledger is the Heart of Business
How often do you look at your general ledger? You should view it often as it contains the truest details about your business. Think of it like your business’ diary. It’s where every transaction is recorded. These details provide you with a clear look at what is impacting your company’s cash flow. When you get a financial statement, think of it as a summary of your ledger. It’s a good idea to print out your ledger at least once a month and go through it with a pen and a fine-toothed comb. Circle the items you are unsure about and ask your accountant about them. They have all the information and can give you the details. This helps you see exactly where you are spending money and offers more insight into both your customers and your suppliers. If you want to know your business – know your ledger.
Secret #4: What’s more valuable than financial statements? – Projections!
Financial statements help you learn about the past. But it’s far more valuable to know about the future of your business. Of course, your past data can help you create a forecast and prepare for the future. Take your most recent financial statement and look at the year-to-date data and transfer it all to a spreadsheet. This gives you great look at what to expect for the next quarter. Most monthly expenses stay the same such as utilities, rent, payroll, and maintenance. You can estimate your margins. By looking at your past financial statements you can plan for the next 90 days. Once you learn to work this process, you can use your financial statements to help you generate predictions about the future of your business.