A recent U.S. Small Business Administration report found that only about half of all small businesses survive five years. This is not necessarily because they provided inferior products or services. It is more often due to poor financial management. To document this point, a recent survey of some 2,000 owners of failed businesses in the U.S. and UK by Xero, a provider of cloud-based accounting software, claimed 65 percent of all unsuccessful business owners blamed financial mismanagement as their reason for failure. They weren’t referring to criminal activities, but rather acknowledging not knowing where their money came from and went to.
“A small or mid-sized firm can easily address this fault by implementing an accounting system that consistently delivers a complete picture of its financial condition as a basis for business decisions,” explained Mitch Brown, president of Legacy Bank’s Pueblo West branch. “That process results in three documents being created monthly, quarterly or annually; an income statement, a cash flow statement and a balance sheet.”
The more frequently these reports are compiled, the clearer the picture of a firm’s financial condition. Most accounting software programs make it easy for a business to create its own financial documents. However, the assistance of an accounting or financial professional is a wise consideration notes Brown.
For example, if a company is seeking outside financing, professionally prepared financial statements are considered more reliable than those generated by the company itself. In any case, the company must still compile the fundamental financial information used to prepare these financial statements.
“The most important of these documents is the balance sheet which is a rolling twelve-month projection of a business’s financial situation,” Brown added. “It provides a real-time, ongoing picture of a company’s ability to pay its debts on time and meet its long-term expenses, expansion plans, and growth goals.”
This is critical decision making data for owners and management, but it is equally important to lenders, partners, suppliers, potential investors and others with which the company may have longstanding business relationships. “If an owner decides to sell the business, the balance sheet can be used to help establish its baseline value,” said Brown.
For some business owners, the task of compiling and maintaining all of the data used to prepare financial reports while still running the company may seem intimidating. Fortunately, an Internet search provides scores of articles, videos and reports to show it can be done by the company or with outside help.
“It’s far better to learn how to prepare and use financial reports than to fail to do so and have the business fail as a result,” comments Brown.
Mitch Brown is the branch president of Legacy Bank Pueblo West and has over 16 years in banking and finance. Brown holds a master’s degree in business administration and is an active part of the Pueblo West community. His involvement includes Rotary Club Pueblo West and YoungLife among others.
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