2. Your gut feel for what’s happening in your business is no longer accurate
The Blind Spot
Business owners often have, in their minds, an expectation of what the numbers should be. When the financials don’t reflect their expectations, they assume the financials are wrong.
In some cases, that’s true – transactions haven’t been properly recorded, and adjustments are needed. In other cases, the financials are correct; it’s the calculations in the business owner’s head that don’t account for everything that actually occurred.
As your business grows and scales, you can no longer keep all the financial details in your head. You need accurate, relevant financial reports that provide a clear picture of how your company really makes money. Without this information, you can end up with lots of activity, even high gross revenue, but little profitability.
What You Can Do About It
Almost without exception, a business’s accounting system needs to be restructured to provide more meaningful information. You may have started with a simple chart of accounts, and it’s grown and expanded over time. Or, you may still be using a generic chart of accounts provided by your accounting software. Regardless of how you ended up with your current chart of accounts, it will need to be refined as your business grows.
Your accounting system must be set up to gather information at the appropriate level of detail. It can be tempting to think you know this information in your head, but you really need to capture and analyze the data.
Most accounting systems have features for reporting on profit centers so you can run a Profit & Loss (P&L) for each profit center, in addition to your overall P&L. Accounting by profit center requires some discipline on the front end when entering transactions, but it’s well worth the value of the information you end up with to run your business.
When it comes to expense categories, you need certain categories for your annual tax return. Beyond those accounts, it’s up to you to determine what additional expense categories are relevant to you and your business. It’s important to keep things simple and only get more detailed or granular when you really need the information.
Once you have this information, you can focus on growing the revenue streams that are the most profitable, assessing those that are performing at a mediocre level, and stop wasting energy on those that are not producing.
First, make sure you have accurate, timely financial statements. Then, evaluate what changes would need to be made for those reports to be more helpful and relevant. Do your financials report:
- Sales mix (by customer, industry, geography, etc.)
- Profit margin by product or service
- P&L by profit center (division, location, etc.)
- Relevant expense categories
Need help making changes to ensure you have accurate, timely, and relevant financial reports? Contact TDT to learn how we can help you refine your accounting systems and create easy to understand visual reports.