For businesses, the number one target is growth: how can you improve year on year, expanding your footprint or portfolio without overstretching too far too fast? The keys to your improvement come through your financial records. Making sure that you always have access to accurate and current information will give you the power to make informed decisions based on your current cash flow.
When it comes to future planning for your business, these records also allow you to make strategic choices with forecasting based on your current figures, which may even open the door for you to access funding to push your business to the next level. Ultimately, at the heart of all this is having your essential financial records up-to-date and to hand at any given time: a profit and loss statement, a balance sheet, a cash flow statement, and any additional KPIs that monitor those key statistics that will point you in the direction of growth.
Make informed business decisions based on current data
Let’s start with the benefits of accurate, real-time data. Your business can’t function properly or in any sort of informed way without leaning on the most current information. There’s no point in deciding for next week based on last week’s sales. An example of this is that if you run a café and have extremely hot and sunny weather, you will have sold more iced drinks than in previous weeks. So when you’re buying your goods for next week, it is useless if you don’t reflect your customers’ current buying habits.
Essentially, having this current and up-to-date data permits business leaders to identify which products, services, or clients are most profitable right now so that they can focus on these as the current highest margin items, giving your business the biggest potential for growth and success.
An additional part of this informed decision-making is cash flow management. In effect, this is detailed tracking of all incoming and outgoing cash for the business and ensures that you have the liquidity to operate each day, whilst also being able to lean on any necessary capital that you might need to use to invest in any growth initiatives. Returning to the café example, you may need to buy a brand new blender to make more luxurious iced drinks for the summer if you have a forecast of two hot and sunny weeks ahead. This allows you to capitalize on the current market conditions and highest margins, whilst also leaning on the capital for an investment to make it work twice as hard for your business.
Accurate financial records lead to better strategic planning
Having accurate, up-to-date data may allow you to act smartly based on current sales, but the accuracy of this data is also extremely important for any form of strategic business planning. Once again, you don’t want to be making a forecast based on an out-of-date period of data. Using historical data allows you to budget and forecast accurately, so it is important to ensure your records are up to date before you begin planning for the periods ahead.
With this data, you can set realistic goals based on your current sales and expenditure records, and you can navigate any market fluctuations effectively with the knowledge that you know exactly what your best products or services are and where your largest margins are.
If your business wants to consider having access to additional funding, having accurate financial records is an essential part of this process. Investors, banks, and lenders require precise and updated financial records. This is because they must examine your business’s creditworthiness, so having these records up-to-date and accurate does impact the ability of your company to secure any loans or capital that you may require for further expansion.
A great way that you can ensure that you’re always looking at accurate financial records is to use cloud-based accounting software, as you will always be able to log in to your business’s records and track any incomings and outgoings quickly with access to charts and tables; whilst software like this also reduces human error by automating the whole process from the moment your business receives an invoice.
There are three types of essential financial documents
Aside from investing in software that can be set up to track your income and expenditure automatically, there are a small number of key financial documents that would make up the pieces of information that are essential for you to work from. These are a profit and loss statement (which is often referred to as an income statement), a balance sheet, and a cash flow statement. Your business may have also set some key performance indicators (KPIs) that track specific targeted goals for growth, and these would also be important when reflecting on how far your business still has to go to succeed.
We’ll start with the income statement. A Profit and Loss document is usually created monthly as a matter of best practice, as this allows you to catch any issues early (such as overspending or a decline in your regular profit margins) but when it comes to analyzing records, you will want to reflect on a quarterly document instead as this is the best way to track yourself against the KPIs your business set and planning major business changes based on a broader trend evaluation than you can do with a monthly set of figures.
Your balance sheet specifically provides a snapshot of your current assets, liabilities, and equity. It’s effectively a one-sheet picture of your business’s financial health and can help you understand what margin you currently have to invest in growth, while still protecting what you have. A cash flow statement does what it says on the tin: it monitors the movement of cash into and out of the business, which is essential for maintaining your day-to-day liquidity. For some people, this could be as simple as using their business bank statements on a regular basis to assess the current picture and where they can still make further improvements.
By having such proactive record keeping, you will always be on the right side of any sudden changes in the business’s cash flow and liquidity. It is also essential for tax compliance, as well. By allowing your business to spot issues early, it is often referred to as the modern-day ‘canary in a mine’, allowing you to react quickly to any problems. Accurate financial statements are the only way that a business can navigate challenges and also take advantage of any growth opportunities that may lie in its path.
This content is provided for informational purposes only and is not a substitute for professional advice. AFP editorial staff were not involved in the creation of this content.
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