Use your accountant for more than tax filing
It’s that time of year again, when inventory counts are completed, bank statements, receipts and invoices are assembled and taken to the accountant to ‘work their magic’, preparing financial statements, as well as preparing and filing tax returns, etc.
Financial statement preparation is important, for more than taxation purposes. Your financial statement is a key management tool, and your accountant should be an important adviser to your business.
When taking inventory, note items that were on hand the previous year (or for several years) and ask yourself if this item, or these items, are essential for sales to key clients, or are they obsolete. If they are required, can they be easily obtained from a supplier on a quick delivery. Obsolete or slow moving inventory is tying up cash (or using up a portion of a credit facility) that could be used elsewhere. There is a cost for this.
After the accountant has prepared the financial statement, you should be having a meeting to review them. At that meeting, you should be discussing things such as the following:
Accounts Receivable: (if applicable) Is this increasing as a percentage of annual sales? What is the average age of accounts outstanding? Is there bad debt? What strategies can be employed to reduce the levels outstanding as a percentage of sales and the age of accounts? Is it time to review sales (finance) terms?
Inventories: – are levels appropriate for business sales volumes? Is inventory level increasing in relationship to sales? Is the number of “inventory turns” in line with norms for your industry?
Accounts Payable: – are levels appropriate for business volumes? What is relationship to inventories? How long outstanding on average? Is there pressure from suppliers to pay faster? Can more extended terms be negotiated?
Sales: – are sales trending upward on a growth basis, or are they declining? What may be the causes of the trends? If its’ growth, is it sustainable, and what will be needed to sustain that growth? If sales are declining, what can be done to correct? What are industry trends? How does your business compare?
Gross Margin: – Is your margin increasing or decreasing? What’s the trend? How does the business compare to the industry? What strategies can be employed to improve?
Net Profits: – Is this improving in terms of dollar amount and percentage of sales? What’s the trend for the business? How does your business compare to the industry?
It is important to consider the financial statements a management tool that should be reviewed more frequently than annually. The preparation and review of internally prepared financial statements on a monthly basis can help identify issues before they seriously impact profitability and to take timely corrective action.
Take the time to learn what your financial statements are telling you, as a business owner, so you can be making the right decisions, and ultimately earning the greatest return that you can for your efforts and investment.