How to take the leap from financial theory to practice in your business
The Missing Link Between Financial Statements & Your Company’s Reality
The Income Statement, the Balance Sheet and the Cash Flow Statement. We all know what they are. We all know what information they can show and what kind of decisions we can make from analyzing them. In Signing Your (Company’s) Death Sentence we saw a glimpse of what they show us. However, when you tried to build one for the first time in your small business, you probably weren’t that sure where to start. What is the first step you should take? Moreover, how can you be sure that the numbers they are showing you are correct and present your company’s reality?
Where to Start
The first step you should take is to request from your accountant the general ledger for the company. This is a report that shows all your assets, liabilities, owner’s equity, sales, costs and expenses with a beginning balance, debit, credit and ending balance. This ledger is your starting point because you have to understand what is registered in each and every account. Yes, you read correctly. Each and every account. This is the only way you can truly understand how your company’s operations are translated to the accounting language.
This will be tedious and long. No doubt about it…but it is absolutely necessary if you want to receive financial statements you can actually trust and base your decisions on. One way to increase your confidence in these accounts, and make your life easier, is to have everything registered and adjusted in your accounting software (or ERP software). What usually happens in small businesses is that all the major accounts are controlled in a spreadsheet (usually Microsoft Excel). Although I praise Excel and use it every single day, this is not the way you want your transactions to be recorded. Transfer all that external information to the accounting software in any way possible. This will be the only you get to receive accurate financial reports quickly.
If you don’t have an accounting software, you can download my free ebook from amazon that will help you pick out this software for your business.
“But How Do I Know These Reports Are Not Made Up?”
The way to understand what is registered in each account, you need to see proof. You need to see an auxiliary report (hopefully from the software itself) that shows you the transactions each account is made up of. So, if you are analyzing your bank accounts for example, ask your accountant to show you bank account reconciliations. If you want to analyze Accounts Receivables, ask for the ageing report, or at least a list of which are the clients that owe you. If you are analyzing taxes payable, ask your accountant the type of taxes that you owe.
A quick way to learn how to do this is to ask your accountant “How do you know this is the correct value?”for every account you have on your general ledger. Don’t be satisfied with values that seem correct. Ask yourself if the transactions or auxiliary report they show you actually makes sense. An accounts receivable of US$ 100,000 is pretty high if your sales have only been US$ 40,000. Why is it so high? Is there a payment that hasn’t been registered yet? These are the type of questions you need to be asking.
I go over some of the most common financial controls for the most important accounts in my free course Financial Statements & Ratios, for which you can sign up right here.
Before You Go…
As I mentioned earlier, this task will take some time, but if you want to start receiving accurate Financial Statements quickly with real data you can base your decisions on, this is the only way to do so.
So, do you know which accounts are up to date in your General Ledger? Start this process as soon as you can and let me know in the comments below how it all goes!
Giancarlo Jiménez, founder of The Finance Course, is a Finance Professional with more than 11 years of experience in the field of Finance and more than 4 years of experience teaching about Corporate Finance in a Business School. Want to learn how to interpret Financial Statements & Ratios to make decisions at your small business? You can Sign Up To The Free Course by visiting this page.
