The Accounting Department
How will a good accounting department make you money? Accountants, controllers and especially chief financial officers have three main functions: reporting the past (historians), measuring the present (scorekeepers) and predicting the future (fortune tellers). A great accounting department will perform all three functions with accuracy and enthusiasm and they will be an important part of your integrated management team.
You literally have gold in your historical financial information. The trick is to mine it properly and give the gold to the managers so they can make more gold.
Historians
History, as you may remember from grade school, tells us what happened a long time ago. In a rapidly growing business, last month may feel like a long time ago.
Accountants will report the financial history of your company using traditional financial statements prepared in accordance with generally accepted accounting principles (GAAP). These GAAP statements are designed for external users and may not be very relevant for management. However, these statements do provide a wealth of information if you know where to look.
Critical information includes trend analysis and ratio analysis that identifies improvements or threats to your financial health. The statements should also measure results compared to your budget-more on that later.
More importantly, accountants (and your information system) should be able to track and report on the key activities and units of production, such as billable hours or square feet of production, which generated those financial results.
You should be receiving your monthly financial reports within one to two weeks of the month end. If it takes longer to receive the information, you probably need to improve the processes, the system, or the software.
Never let your software constrain your information and thus your potential for greatness. It doesn’t make sense to run your multi-million dollar business-and probably your largest retirement asset-with ‘one size fits all’ off-the-shelf software that cost a few hundred bucks, does it?
Here is a list of critical historical reports that you should be receiving at least monthly from your accounting department:
Balance sheet and income statement with variance reports on dollar change and percentage change compared to the ‘same month last year’ and to ‘year to date’ results.
Cash flow analysis with a detailed display of changes and trends in your working capital, loan balances, financing and investing activities.
Financial ratios indicating trends and changes in profitability, liquidity, leverage and creation of shareholder equity.
Gross profit by product or service line, showing dollars of contribution and percentage of profit.
Project cost or job cost data showing detailed revenue, expenses and profits or losses by individual job or project. This is the most powerful report in your business because it measures what your employees and managers do every day: serving your customers. Profitable jobs drive corporate profits.
Sales data by major customer and industry segment.
Year to date performance compared to budget.
Changes in the annual budget based on current results.
Warnings for trends that are negative or will impact profits, resources, covenants or customers and suppliers.
Business valuation (that is, your wealth!) – a standard rule of thumb for small and medium businesses is an earnings multiple of five times your EBITDA (earnings before interest, taxes, depreciation and amortization). There are many important actions and decisions that you can take to improve both the multiple (there is judgment involved) and your EBITDA.
Use charts and graphs to present important information and then test for understanding.
A one page summary highlighting key findings-both positive and negative-at the front of this report.
Most of the information listed above-the gold-is just sitting there, waiting to be mined, analyzed and shared. A good accounting department will produce the golden nuggets that identify the opportunities for dramatic profit improvement.
What monthly reports are you receiving, by when, and how are you using them to run your business?
From The Piggy Bank
The right information, when communicated effectively, can motivate entire companies to make better decisions and take action.
Have a profitable week!
