Imagine driving a car with the windows blacked out, you had no mirrors, and the dashboard could not be seen. You would not know where you are going, where or how far you have been, and at what speed you are travelling. Driving blind is not recommended for the roads and is not a particularly good idea for businesses. According to a recent study by the University of Technology in Sydney, commonly cited reasons for business failure are, in order of frequency: financial mismanagement, bad management, poor record-keeping, sales and marketing problems, staffing problems, failure to seek external advice, general economic conditions, and personal factors. With that, it is vital that financial reports, budgets, and plans are established ahead of and updated as necessary to ensure that you have a clear vision of the direction your business is heading to.
Reports
Reports that are six months or more are old historical documents. Reports from last week or last month can give you valuable information on how your business is travelling now. Two key reports in a business are the profit and loss report and the balance sheet. Most people have a reasonable grasp of the profit and loss report; however, some see reading the balance sheet as the dark arts of accounting. The balance sheet is a report that is often confusing and misunderstood, If you don’t understand it, get someone to explain it. A good business report describes a present or past situation in an objective way. It is not about what you think, it is about an objective situation that needs to be presented clearly. There are a number of important qualities that make up a good financial report.
Understanding the User’s Needs
The report needs to address the questions of the business or person that is going to use the report. A broad-based profit and loss report will not have much useful information for investigating detailed stock analysis, whereas a detailed stock sales report can indicate which particular stock items selling well or providing the best profit margin. If you are writing or preparing a report you need to understand the questions that the reader wants to be answered. If you are requesting a report, be specific about the information that you require and the questions you need to be answered.
Financial Reporting Should Not Be Exhaustive
A financial report cannot contain and explain fully every detail of a business; their report needs to be targeted to a specific question or required information. If a certain part of the report needs to be in more detail, this can be the subject of a more detailed report on a focused area. Trying to make a report cover every detail is likely to cause confusion.
Pick Up Significant Performance Indicators
The best and most useful reports will quickly identify the significant performance indicators that the report was designed for. When a report clearly identifies areas of interest, whether they be problems or standout performance the report is particularly useful. For the reader of the report, it is important to get to the area of interest quickly as possible and to provide succinct information. Graphs and graphic representation of information can be extremely useful in focusing the reader’s attention on the main areas of interest. A graph, like a pie graph, can highlight areas of significance very quickly, a line graph or a bar graph can easily show a trend and an anomaly in the business. The important thing to remember here is that asking a graphic representation to show multiple events is likely to diminish the impact of a good graphical representation.
Budgets
Budgets do not ensure success, but they do assist in avoiding disappointment. A budget is a critical tool for converting broad strategies into concrete, actionable targets and objectives. The hope is that the defined targets and priorities will be met if the budgetary guidelines are followed. But budgets are an area that is often ignored. Future trading and expense budgets can fit in with your planning to guide you to the foreseeable future. Budgets are often seen as crystal ball gazing. However, they can give you an idea of how you want your business to perform in the medium and near future. Budgets provide the markers along the highway of your business that answer the question “are we there yet?”
Judging Success or Failure
When things don’t go according to plan, the budget allows you to recognise and reflect on deviations from the plan. The budget establishes metrics against which progress or failure in achieving targets can be measured, as well as facilitating prompt corrective actions.
Enforcing Accountability
Budgets should be detailed enough to represent expected revenue and expenses for each segment. This mindset brings the budget down to a personal level, reducing attempts to shift responsibility to others. A company can easily become less effective if it does not face the harsh reality of enforcing a system of accountability. Penalties are not necessarily needed when there are deviations.
Cash Flow Budget
One budget of significance is the cash flow budget, this is particularly important if cash in the business is tight. What brings many businesses much grief is the quarterly BAS, even a relatively small business after three months of trading can have a BAS bill of $30,000 (or more) which will be due two months after the end of the quarter if provision is not made for this the cash situation can be quite severe.
Planning
You have probably heard the expression “to fail to plan is to plan to fail”. Effective business strategy may be the difference between success and failure. A business plan will assist you in obtaining funding, prioritizing your activities, and assessing opportunities. A well-prepared business plan will seem to be a lot of work at first, but it will save you time and money in the long run. Plans are not a silver bullet for businesses, but they do provide a very useful pathway to the future. A plan can be a very detailed point by point document or maybe a broad and general indication and guide the direction and performance of the business. They are the ‘Sat Nav’ for your business, taking you from where you are to where you want to be. Using the driving analogy, plans will show you the route you want to take, the streets to use and the streets to avoid, where to stop to check your progress, and to confirm that you are on the right track.
Allocating Resources
A business plan is essential for allocating resources in a company. It is a tool that can be used to help you raise new funds or as a planning guide. A successful business plan explains how you intend to use the bank loan or investment you’ve requested.
Strategic Alignment
Is your day-to-day activity in line with your main business tactics? Are those strategies in line with your overall strategy? If that’s the case, you’ve achieved strategic alignment. Otherwise, the business planning would reveal the secret inconsistencies. You’re out of line if you own a gourmet restaurant with a drive-through window, for example.
Realistic Regular Reminders
We all want to do the best for our clients, but in order to preserve quality and strategic focus, we must often push back. It’s difficult to recall your goals and concentrate when you’re in the midst of your daily routine. The business planning process becomes a regular reminder. Making use of reports, budgets, and plans provides a huge benefit to every business. Utilising them willl help you get a clearer direction for your business so you won’t have to drive blindly anymore. Have a look at AURIC Financial’s 7 Steps to Business Efficiency and learn how to handle your business and finances efficiently.
Dai is a Master of Business Administration graduate of the University of New England, Registered BAS Agent and member of the Institute of Certified Bookkeepers. For 16 years he owned, operated and managed businesses in the tourism and hospitality industry – particularly Accommodation, Event Management, and Food & Beverage Management. In recent years, Dai has worked in the Not for Profit sector, Real Estate, Motorsports, and Motor Trades industry and business services, in Finance, Administration, and Practice Management roles, before becoming a Professional Bookkeeper in 2009.
