Myth #1: Financial statements are just history. I manage my business forward. The banks and tax men can use the financials but they aren’t much use to me.
Any business owner who thinks like this doesn’t understand the constant loop between financials and the budgeting process. Budgets need to be dynamic, adjusting to changes in goals or results. Planning means understanding how your business will reach these goals. Contrary to common belief, if you can’t plan your business, you don’t know your business! Full disclosure: I did not create the preceding aphorism, rather, it was the mantra of the Fortune 50 corporation where I began my career in finance and accounting.
Your historical financial statements must be the bedrock on which your budget/plan is built. While you can prepare your budget independently from the prior year’s financials, it’s important to bridge the information back, understand both the differences and consistencies, and plan accordingly.
It’s also important to understand that budgets are worthless without results for comparisons. Comparing actual results to budgets will tell you where you’ve over-performed or under-performed, where you have opportunities or unexpected risks. Analyzing this information will help you incorporate the appropriate standard procedures into your business and show you where you need to make repairs.
If you don’t take the time to compare budget plans to monthly financials, you are setting the stage for future surprises that can cost you dearly.
Look at your financial statements as an ongoing process to monitor, manage and improve your business. This will help you get a step up on the competition and propel your business into the future.
In the next issue we examine Financial Statement Myth #2: I don’t understand the financials, therefore I don’t have any need for them.