Will your business sink or swim after COVID? Are you already in deep water without knowing it?
‘If you can’t measure it, you can’t improve it.’ Peter Drucker known as the ‘founder of modern management’, coined these words that apply to all businesses and especially to your financial position.
Reporting your financial data is critical in understanding where your business is at and forecasting your financial position to help you make better management and strategic decisions. Let’s apply some reverse engineering – you need good cashflow for your business, but you need good records and a means of accurate reporting for good cashflow. If the way you are reporting your financial information is inaccurate, that can lead to bad company decisions, poor budget planning and Cashflow Management, lost sales and profit, missed business opportunities…and the list goes on.
What are financial records?
Financial records are your business’s financial statements: invoices, receipts, documents of primary entry, balance sheet, income statement and cashflow statement. It also includes footnotes on the statements that provide more information about specific topics. In addition, your shareholder reports, any investor prospectus and whatever financial information you post on your website also count as financial reporting. If you run a company, directors must keep these records for seven years.
Here are 6 consequences of not keeping accurate financial records:
1. Dangers of having inaccurate financial reports
As a business owner, you need to be aware of potential problems and be sure that your accounting is managed correctly. Always read your financial statements and reports – no matter how good your team is and how much you trust them, they’re only human and may have inadvertently made a mistake that could cost you. Inaccurate reports can also land you in legal hot water.
2. Bad decision-making as a result of inaccurate financial reports
The bad numbers that are the result of inaccurate financial data could lead to overspending, not investing properly in research and development, not paying staff appropriate work entitlements and a host of other things. Exaggerated profits can lead to higher taxes.
If your reports understate your debt load, you may discover you're deeper in the red than you thought. Bad financial decisions have bankrupted many businesses.
3. Preventing the cause for inaccuracy
Whatever the cause for inaccuracy, you can take steps to correct the deficiencies. Frequently, managing the finances in an small to medium-sized business (SMB) is handled by a family member or someone without accounting experience. Outsourcing your accounting role could be a solution for your SMB business. Another solution is cloud-based accounting software; there are numerous ones on the market that are safe, easy to use and reputable. This allows you to work on your books from your office and your accountant can access them from theirs. The cloud also provides a layer of protection and disaster recovery.
4. Poor budget planning
Businesses of all sizes must plan their budgets to ensure the operation stays on track. The budget process involves assessing all of the financial needs of a business and creating a financial road map to make sure employees and bills are paid and the business stays on course with its earning and income projections. Businesses that fail to institute a proper accounting system run the risk of underestimating earnings, which can ultimately lead to business failure.
5. Lost sales and profits
If you don’t pay your bills on time, pay the wrong amounts, bounce cheques or miss payments entirely, you might lose the services and products of your vendors and suppliers. If you don’t have what you need to make your product or provide your service, you lose sales. A temporary slowdown in the production and ability to deliver goods and services can cause long-term damage.
6. Missed opportunities
You might decline opportunities to expand your business, increase your marketing or reduce debt because you think you have less money than you really do.
Investors rely on financial statements to assess a business’s worth. Inaccurate reports could make your business look less valuable than it is. If you issue a statement of earnings, then have to restate them later because of errors, that's not good either. Your stock price may drop, your reputation takes a hit and it may become tougher to obtain capital.
No matter how tedious it may seem, check your financial reports. Note errors, keep accurate records and talk to your Accountant. The financial health of your business depends upon it.
Related: How to get the most out of your Accountant?
Have you noticed our #FridayExpertTips... here's one that relates to #BusinessAccounting
"Always keep your RECORDS UP-TO-DATE. Businesses with up-to-date accounting records are far better at making informed, educated decisions based on real, current facts."
This information is accurate on the day it’s published and is subject to change as the situation around Coronavirus (COVID-19) evolves. Our conclusions may not be valid if there is any change in those facts, circumstances and assumptions. Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused.