small business tips

Creating a Multi Dimensional Financial Report

It’s 10am on a cold and rainy Wednesday morning and you’re travelling to your accountant’s office for your annual “mind-numbingly” boring meeting so that you can pretend to be interested in all of their “great” insights and analysis that’s sure to be the highlight of your day. That’s probably your accountant’s view, but not yours, right?
And all of this is presented with your total value in mind, so you better appreciate what your accountant says and not to mention, all of their hard work…..!

Now, although this “really helpful and insightful” information was taken from reports based on last year’s business activity, I’m sure we can all agree that knowing your Gross Profit Margin and Accounts Receivables balance from 6 months ago is really going to grow your business…. Agree? Well, maybe not.
In fact, my pet-peeve with the above situation which I am sure you have all experienced is not that the accountant’s meeting is boring and uninspiring (that’s a different conversation), but rather, the time frame and the reports that accountants use to generate their so called, “helpful and insightful” information and advice is so outdated that it is genuinely hard to believe what’s going on within my industry.
Let’s discuss the reports that are still used, shall we.

I remember back when I was first starting out as an accountant and my main job was to reconcile a company’s bank account in the accounting software. Initially, I was quite intrigued as to where and how this data would be processed and quite frankly, what was the final outcome. Hence, what is the point to all of this?
As I took some time to navigate around the software I noticed that all of the data was being manipulated into two separate reports; (1) The Profit & Loss Report and (2) The Balance Sheet Statement.
Now, did you know that both of these reports were first created back in the 15th Century?!
That’s right! We have been using the same two reports to account for our business’ activity and position for over 600 years!

Now, let’s fast forward a little bit to today’s age and allow me to ask a question; Why does the business community still rely so heavily on only these two reports when conveying or obtaining important business information?
Only using these two traditional forms of reporting is nothing more than one dimensional. It’s like watching an old Mickey Mouse cartoon from the 1920’s; like the one where he’s on the boat dancing and it’s black and white and very outdated compared to what we’re used to these days.

The Profit & Loss and Balance Sheet only give you a certain amount of information and these two reports should never be a business owner’s only reference for how their business is trading and operating.
So, what should we be trying to achieve?
Well, my idea is that we should be trying to create a 3 to 4-dimensional image of our businesses?
So what reports should we be including in our 3-4 dimensional Financial Reporting?
Sit back and let me take you through them!

1. Business Budget
Most of the time, small business owners rarely establish a Business Budget, let alone, know and understand how to create a budget at all!
However, if the business owner does decide to create a budget, what is usually missing is the understanding that the magic happens during the creation stage and not the final result. This is because the figures inputted into the budget are usually only what the business owner wants to achieve but with nothing material or strategic behind those desired figures to lean on. That’s the problem!

The key point when approaching a budget is that you need to always look deeper into your internal operations and market and not just input blindly your desired results. Anyone can simply make great looking figures up.
To give you an example, let’s say that you want to increase your turnover by 25% over the following 12 months which you hope will increase your profit by say, 15%. Instead of simply inputting the increase in the sales column with nothing behind those numbers, you need to also assess your industry’s market, your competitors and more importantly your internal processes, culture, employee roles and responsibilities and consider new ideas that can potentially propel your business to the next level.

2. Cash Flow Report
As you can imagine, a business’ Cash Flow Report in a traditional sense, is essential for tracking the business’s cash that enters and exits its coffers.
However, timing is also very important and creating an interactive Cash Flow Report has so many benefits.
Again, the main point of this report isn’t only to ascertain how much money has entered and exited the business, but more importantly, when and why!

For example, the questions you need to ask of this report is; How much cash did we actually receive for the month of July? Roughly when did the cash enter our business, was it early or late in the month, and finally, why /why did it not enter our coffers when the business expected it to?

If you think about it, the question, “Why” is really important but often not even thought about.
The question Why, when dealing with your cash flow needs to be answered because this always travels back to your internal operations, staff, structure, marketing and every other part of your business!

So, in summary; when you are designing your Cash Flow, ensure that you ask yourself the big three questions – How much? When? & Why?

3. Departmentalisation Flow Chart
When I came to this part, I need to be honest, I was a little bit worried because when I start talking about Departmentalisation, I get quite excited….

You’re probably asking yourself, why would you become excited about Departmentalisation?
Well, because in my opinion, this is the number one reason why most small businesses fail in the first two to three years, from creation.

Because the business’s internal structure and operations is in disarray right from the beginning, the business only operates at half capacity at the very most. When the owner establishes their business from infancy, it is usually on the basis of what the owner is good at.

For example, the business owner might be great at operations, but average at every other aspect of business, such as the marketing, admin, bookkeeping, accounting, expense and invoice management and general communication, just to name a few.

At first, a business can handle these inefficiencies, however, as it grows and becomes more complex and unstable, Departmentalisation is a must.
So, you are probably asking yourself how to do this.
Well, it is actually quite easy.

You can make a start to departmentalize your business, in only three steps –
Example –

Step 1: List the following 5 Departments – (a) Marketing, (b) Administration, (c) Operations, (d) Bookkeeping & Accounting & finally, (e) Customer/Client Management & Communication;

Step 2: Within each Department, list all of the necessary activities that encompass that Department, from the most important to the least important;

Step 3: For each Activity within each Department, assign the employee who is responsible for that Activity;
Then, you will need to start analysing this process and seeing what is working and what is not working.

4. Staff & Position Profiling
Staff profiling is ultimately just as important as all of the other above reports.
It’s obvious that businesses are just a group of people working together towards a common purpose… Or at least, that’s how it’s meant to be.

However, for a lot of small to medium businesses, a substantial problem they face involves around their general staff and management team…. Or in other words, their people.
Staff & Position Profiling is a positive and proactive strategy used by the business to ensure that each Activity within each Department employs the most suitable people for the job.
As you can imagine, the business would essentially self-assess their internal operations based on the above three reports and determine what type of people (personality-wise) they would like to employ.

By doing this, it would benefit the business in tremendous ways because then personal Key Performance indicators (KPI’s) can be developed to ensure employee interest, reliability and performance will be achieved.
This strategy would also give a greater rise to a better Conflict Management Process because as the business has a proactive and clear idea as to who works together in each Department, this is a huge step forward for any small to medium business.

So, in summary, implementing a Business Budget with the premise of going beyond the numbers, then developing a Cash Flow reporting system to track cash entering and exiting the business with sufficient monitoring in place to track timing and circumstance of any material ebb and flow which took place, along with accompanying this with a strong internal focus on the business’s staff, focusing on Departmentalisation and Positional Profiling to ensure you have the right people in the right position doing the right things within your business.
I hope this helps!

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