Do you have the right financial information to run your business?
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Posted: Tue 6th Aug 2024
If you don't have the right information to run your business, then you're fighting with one arm tied behind your back.
The right financial information should fit your business like a glove that's tailor-made for you. When the right information is flowing through your business – reaching the right people in good time – then better decisions are made.
And you make more money.
So, how do you progress from the financial information you see today to what you need for the future?
To begin with, look through the wrong end of the telescope to see what you need at the far end of the process and then start from the beginning so you arrive at the right place.
These are the building blocks.
Accounting software and training
Some accounting software is better than others at generating reports. This is odd given that the single most important reason for doing bookkeeping in the first place is to measure and improve financial performance.
And the right software is no use if no one knows how to use it properly – training is essential!
In our view, QuickBooks is the best software for reporting by a long way but Xero has invested in this area of its product and has improved recently.
Chart of Accounts (CoA)
Your chart of accounts is the DNA of your accounting. The accounts you include in your CoA will appear in your financial information, so give this plenty of thought.
Your chart of accounts is a list of all the different accounts you might want to use to classify the transactions you have, such as:
sales accounts for the different products/services you sell
expense items, such as salaries, travel, advertising, etc
If you're unfamiliar with the role of the chart of accounts, then take a look at the video in this blog post: Creating a useful chart of accounts in Xero.
It doesn't matter if you don't use Xero, the thought process for structuring and future-proofing your chart of accounts will be the same.
This might be the best 10 minutes you spend today!
Data entry
You can't generate the right financial information to run your business if you don't get the data entry right.
Garbage in, garbage out!
Make sure that your data entry is complete, accurate and up-to-date and that transactions are classified correctly using your chart of accounts.
There are some good data-capture apps that will scan and categorise suppliers' invoices, receipts and expenses and send the correct accounting entries to your accounting software. These are worth looking into. But don't forget your CoA!
In one business we saw, the accountants had classified a large number of expenses to an account called "general expenses" so no one knew what the company had been spending its money on! Here's the story:
What sort of financial information are we talking about?
If you sell and buy on credit, then this list is a good starting point:
P&L this year to date versus last year to date
P&L by month for the last 12 months
Balance sheet this year versus last year
Aged debtor list in size order
Aged creditor list in size order
Most accounting software will produce these reports and you should change your software now if yours doesn't. Make sure you can get the debtor and creditor reports in the more useful top-down order and not the alphabetical order that comes as standard.
But this is only the beginning.
What about:
profitability of customers
profit margin of products and projects
sales commission versus sales made
actual versus budget reports
You're in the realm of figuring out what information you need and then asking how it can be produced.
Sunlight is the best disinfectant
Producing financial information is not enough. It needs to be shared. It needs to be understood, reviewed, questioned and used to make a difference.
Having different people across your business using your financial information improves the quality of the information. There are bound to be errors spotted and constructive criticism.
So get people engaged with the information and you should see an improvement in your results.
Accountants and bookkeepers are not all good at financial information
This is an odd thing to say but we see it all the time.
Too many bookkeepers and accountants concentrate on the data entry side of bookkeeping and don't give nearly enough thought to the information that needs to come out of the other end.
Also, firms of accountants have their in-house ways of doing things which means you could be getting the bookkeeping and reporting that works for them and not the right thing for you.
It's your business and you need the right financial information to run it and grow it successfully.
Don't fight with one arm tied behind your back!
Relevant resources
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