One of the more challenging or even overlooked areas for small business owners is taking stock of their financials. Whether they’re burning issues such as trying to collect on delinquent receivables or taking a deeper dive into key financial statements, there are many lessons to learn and apply as you close out the business year—just make sure to go over them with your accountant.
It’s a worthwhile exercise that can help you make big inroads into improving your bottom line and cash flow position, but finding the time and knowing what indicators to analyze isn’t easy. This is where an accountant can help.
5 Financial Indicators to Review with Your Accountant
The State of Your Receivables
How many past due invoices are you facing as you head into the year-end? While this data is something you can pull yourself, it’s important to have this conversation with your accountant because it can have a direct impact on your cash flow and bottom line.
According to Fundbox’s own research, 64% of small businesses are affected by late payments. That may not seem too surprising, but here’s where the data starts to get worrying: 48% of net 30 invoices are paid late, and 45% of net 60 invoices are also delinquent, as are 35% of net 90 invoices. It’s a waiting game that can have dire consequences for your business, since a lack of cash flow is the number one reason why most businesses close their doors.
If your receivables are a concern, have a frank discussion with your accountant. They can recommend preventative strategies to help you overcome the problem of late paying clients, such as tweaking your invoices, improving your collections process, and invoice financing.
What’s Working and What’s Not in Your P&L and Balance Sheets
Your P&L statement and balance sheets are a key indicator of your fiscal health. The trouble is that many entrepreneurs don’t understand what their financial statements are telling them or even know what to look for.
A good accountant can help you decipher all those numbers. On your P&L statement, for example, you can identify where revenue is being generated, any profitability pitfalls to be aware of, and where you may need to cut costs (e.g. cost of goods sold).
As you look to your balance sheet, your accountant can help you determine the state of your assets, both those that can be easily turned into cash (accounts receivable, inventory, etc.) and those that can’t (tangible assets like real estate, equipment, machinery, etc.). It will also reveal how much your company owes in terms of liabilities and debts. What does this all tell you? Well, the balance sheet is a useful barometer of your ability to access cash and therefore cash flow as well as your options for pouring that cash back into the business to fund growth.
Online accounting software can make this analysis much easier. Reports can be automatically generated and easily shared with a pro so that together you can determine what’s working and what isn’t.
The Amount of Cash You Have in Hand
Your cash flow statement is a vital tool for establishing how cash has entered and exited your business over the year. In fact, it’s a much stronger indicator of your cash flow position than your P&L statement, as P&L records revenues and expenses as they occur, not when that money hits your bank account. You may have closed a deal for $5,000 in October, but could still be waiting for payment three months later. If you look at your P&L statement, that income is logged before any money changes hands and can skew the financial picture.
Your cash flow statement, instead, records when the payment is made and the cash is in hand. This is important because businesses live and die by cash flow. The cash flow statement is particularly helpful in determining your cash flow position.
Your accountant can help you review your cash flow statement, identify problems, and help you formulate flow statement to inform a more accurate cash flow forecast for the new year. Read more about how to analyze your cash flow statement.
Your Cash Conversion Cycle
Your business’ cash conversion cycle (CCC) is a measure of the time it takes to shift inventory, collect payment, and pay your bills. As such, it’s a key indicator of your ability to maintain a healthy cash flow position. Your CCC should be as short as possible and can be calculated with the help of your financial statements. We offer some tips for doing this here, but again, if you maintain inventory, it’s an important to understand your CCC and, if necessary, takes steps to improve it.
Your Overall Grasp on your Financials
How often are you looking at your cash flow forecast? Do you even have one? What about your business budget—do you revisit it often? Year-end is a useful time to review your financial management habits with your accountant. Perhaps you could benefit from the ease and finger-tip analysis that online accounting software can give you. This won’t necessarily replace your relationship with your accountant, but in fact it will make collaboration easier because you can share reports and tax data with stakeholders at the click of a button. Have a frank conversation about your strengths and weaknesses, and put a plan in place to correct them next year.
Disclaimer: The above does not constitute financial advice. Please consult an accountant for professional opinion.
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