We often hear of the challenge facing people who aren’t financially literate and may struggle to read a balance sheet, P&L, or cash flow statement. The challenge with all of these tools, apart from their technical nature, is that they weren’t really designed to interoperate with business and wrap decisions around. They’re financial tools that aid the accounting process and help investors understand a business’s position and overall health, but they aren’t always good operating tools or well-suited to a general business audience.
Running a business requires an amount of manual oversight and an amount of automation. Skewing too far manual or automated creates quality issues. The solution is a combination of art and science. Often founders opt for a spreadsheet and financial model to run their business as they assume all companies are unique. But companies can be a bit like people. We are different, but there are themes and commonalities that occur.
Consistencies across businesses
Here are some of the things that are common across businesses
- You have some form of revenue stream, whether it be product sales, services, or subscription revenue.
- The nature of the business is B2B or B2C.
- You have expenses.
- You have staff, either contracted or employed.
- Everything changes. Your revenue fluctuates, your expenses increase, and what you pay your staff increases over time.
The above is often the core of a business. Whether you deviate down a path from there and sell digital subscriptions or have a 500-person agricultural business with inventory and seasonal considerations, the core of the business tends to have the same traits.
What Financial Reports are good for
- The balance sheet is good for understanding your company’s assets, liabilities, and shareholder equity at a specific point in time. It’s good for getting a sense of a company’s financial well-being making it also useful for investors.
- The cash flow statement paints a picture of how a company’s operations are running, where its money comes from, and how money is being spent. Also known as the statement of cash flows, the CFS helps its creditors determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay down its debts. The CFS is equally important to investors because it tells them whether a company is on solid financial ground.
- An income statement (or profit and loss / P&L statement) shows the revenue, expenses, gains, and losses of a company during a particular period. It can be useful for understanding a company’s operations, and areas that are over vs underperforming.
What Financial Reports are not good for
Financial reports are not so good for:
- Making operating decisions.
- Understanding where your business is headed.
- Knowing what your cash position should be on Friday next week.
- Timing for when to pay salaries versus other payables.
- Knowing what your cash position should be 12 months from now.
- How increasing staff salaries will impact your cash position over the next 12 months.
- How you are tracking versus your cash buffer and months of runway/cash in the bank?
- Knowing your burn rate and how it changes over the next 12 months.
- Breaking down the details of where things are going off track.
- Reconciling forecast to actuals.
Bring your business and finances together
A business isn’t its accounting and accounting isn’t a business. They are their own things so using one to drive the other doesn’t make a lot of sense. We think the solution is in between. Setting up a team and a process to bridge both the business and the finances with communication between both sides on a regular basis creates an unstoppable solution to two siloed, independent areas.
Find answers to your business needs
There are various tools for determining the questions above. Make a list of the questions you want answers to and then set about generating them. Cashbucket can also help you with this.
Give Finance what it needs
Taking from finance and accounting isn’t the solution, they also need to understand what is happening in the business. What staff additions are planned, salary changes, revenue changes? Should they expect a tighter month or a delay in something? Should they chase an important invoice? These are all business decisions and operations, but they impact the financial health of the company. You can create a queue of things you want to be answered by finance. Likewise, be willing to create a queue of business changes that finance needs on a regular basis to keep them informed and inform your models and forecasts.
You don’t have to be an accountant to understand your business’s finances, but you will likely need to set up additional tools to be able to manage things appropriately. For some, reading accounting reports is enough to run their business. For others, especially in the early stage of growth, a spreadsheet is enough. Businesses with greater complexity will need better ways to project cash balances, derive the ever-changing burn rate of the company, and overall make better business decisions. Additionally, you need to give finance staff sufficient information ahead of time for them to adequately interpret where the business is heading and operating, or you will end up with a disconnect and incorrect data and reporting. None of this is beyond the grasp of any founder these days, just ensure you don’t leave it too late to put sufficient processes in place.