As a small business owner, your success depends on having enough cash on hand to pay all bills when they come due.
Your success also depends on being able to read financial statements as they contain a wealth of information about your business. When used wisely, financial statements provide:
Let us begin this series of three blogs with a few definitions to understand the difference between Finance and Accounting:
Finance is the task of providing the funds for a company’s activities. It involves balancing risk and profitability, while attempting to maximize owner’s wealth. This entails three interrelated decisions:
We will not be addressing Finance in this series of blogs.
Accounting, on the other hand, is called “the language of business” because it is the vehicle for reporting financial information about a business entity to many different groups of people.
In this post, we will focus on Managerial Accounting as this is the most important tool for a small, privately-owned company. The next blog will address Financial Accounting and the third will focus on Score Card (also known as Key Performance Indicators).
Managerial Accounting is forward-looking and model-based to support decision making. It is usually confidential and used by management, instead of the public.
In the story Alice in Wonderland, the Cheshire cat tells Alice: “If you don’t know where you are going… any road will take you there.” Managerial Accounting not only looks at the history in a specific way but uses it to show the destination and the best way to get there.
The most important management report is Cash Flow Forecasting. Cash flow is the life-blood of all businesses – particularly for the start-ups and small enterprises. As my colleague Ed McMahon in his book Understanding Small Business said: “When you are out of cash, you are out of business.”
Given this great importance, every small business must build a model to forecast cash flows by month for at least the next six months (preferably 12 months). The level of details should be just enough to capture major variables affecting profitability and significantly less than that in a Financial Accounting report.
Here are the key reasons why cash flow forecasting is so important:
In addition to the Cash Flow Forecast, Managerial Accounting consists of various reports tailored to individual business needs, such as
You can find a simple cash flow forecasting template at:
You can find other useful templates for building or updating a business plan at:
In summary, to run a business successfully,
In the next post, we will discuss Financial Accounting. In my 3rd blogpost, we will focus on the Score Card (Key Performance Indicators).