Running your business without proper financial statements is like driving a car without knowing the clutch, brake, accelerator, and speedometer. Regardless of your high enthusiasm, it is impossible to drive safely under such circumstances. Despite that, plenty of startups and small businesses keep going ahead exactly like this. The financial statements they make are either not of much use for the management or are mostly inaccurate. Sometimes, they postpone it for months on a row that they become no longer relevant. So, if you are a budding entrepreneur who is relying on his/her new business as the main source of income, such a state of affairs can backfire immensely.
The organization and accuracy of financial statements is one thing you cannot put aside – it is an absolute requirement. It only helps you to forecast the performance of the business in upcoming times but also to attract reputable investors and creditors and make them the key part of your expansion plan. Here are some expert tips to help you create error-free and crystal-clear reports –
- Understand the Basics
The financial statements are called so because they indicate the information about business activities and the overall financial position of the entity. The four major components i.e. an Income Statement, Balance Sheet, Cash flow statement, and Statement of Retained Earnings are intricately linked to each other. Hence, to be able to connect them and present in a standard manner, you need to have the proper knowledge.
- Use an Accrual Accounting System
Businesses can use any of the two basic types of accounting in their bookkeeping software – cash or accrual. The cash method is usually the simplest where income is recorded when cash is received, and expenses are mentioned when they are paid. However, an accrual basis is when income and expenses are recorded as they occur, regardless of whether or not they are made in cash. The latter one does a better job in reconciling and understanding of business performance month by month.
- Segregate the Costs
Categorizing your costs into selling, administrative, and overhead helps attain precise figures with regards to the gross margin amount. Gross margin percentage is basically the sales revenue a company retains after incurring the direct costs and is thus, used to measure the relation between the production costs and revenues. It can be calculated by using a simple formula:
Gross Margin = (Total Revenue – Cost of Goods Sold)/Total Revenue x 100
- Set Accountability
It is sensible not to hold a single manager responsible for all revenues and costs. Instead, involve multiple managers for different categories of costs that make up a crucial part of the financial statements. Pay attention to answerability (information and justification for one’s actions in line with the expectations) and enforcement (acceptance of the consequences for failing to meet these expectations). You can soon see a drastic improvement in the working style of the staff and the performance of your business.
