In my experience, most small business owners want to know their numbers, but they lack the proper bookkeeping system.
Additionally, many business owners lack the general knowledge and skill set to actually know their numbers. Financial reports can be confusing and nauseating to some people. Very few business owners know their numbers in and out, but those who do tend to run super successful businesses.
Where I typically see the breakdown is actually in getting the bookkeeping updated. Most owners look at bookkeeping as a pain and therefore push it to the back burner. Let’s be honest, bookkeeping is not that sexy and most people think it is a waste of time. But the end result of bookkeeping is financial reports that you can use to make decisions.
Analyze Your Financial Reports Often
Once you have a bookkeeping system in place, it is important that you utilize it properly. You should learn to use your bookkeeping as a growth tool. Once you have access to updated financial information on a regular basis, you will learn how to use it to guide your business. Look at your financial reports often and use them to make strategic business decisions based on raw data.
Turning your bookkeeping system into a growth tool requires that you set goals (i.e., create a budget), measure results, and then use that information to forecast your financial future.
Set Clear Goals and Monitor
Another important step in finding value in your bookkeeping is to build a budget for your small business and monitor your progress. A budget should be thought of as a broad picture of the business. You should build an annual budget before the start of every year.
Use your budget to compare your actual results with your budgeted expectations. Look for large variances and then use that information to help you build a forecast. There is a difference between a forecast and a budget. It is a good practice to leave your budget set once it is built, but the forecast fluctuates with what actually occurs in the business.
Forecast the Future
Hands down, the most powerful financial tool that you will use internally is a financial forecast. If you keep your bookkeeping is updated you will always know exactly where we you stand. You should look at your financial reports monthly to make sure you are on track. Compare your budget to the actual numbers and analyze the variances. You can take all of this information, consider what is likely to close in the sales pipeline, estimate your expenses, and use everything to build out an accurate financial forecast.
Your financial forecast is what allows you to make critical business pivots before problems happen. The forecast allows you to take advantage of every opportunity and also the ability to manage your risk.