Do you produce financial reports-the balance sheet and income statement-every week? Do you analyze sales, costs, cash flow and debt every week? If not, you may be heading for the cliff. Stop and find out. From here on, you are going to know.
KFP stands for "known financial position." A KFP is essential to your success and profitability. "Known" is the key element. It may be that you are losing money or deep in debt. Find out how much and how deep. That's the starting place. The financial reports are the scorecards in the game of business. You can always improve the score. But you must know where you are right now.
This seems obvious but from my experience as a business consultant, nine out of 10 business owners don't know where they stand financially. There are a couple of reasons for this:
- They don't know how to keep score.
- They are afraid to look, because they don't want to know how bad it is.
If you are the one in 10 who runs, reviews and understands financial statements, congratulations. If not, well that's going to change starting today.
You'll be at a KFP when:
- You can generate income statement and balance sheet reports and trust that the information is current and accurate.
- You can go through the reports line-by-line, account-by-account and understand what each dollar amount represents.
Do your accounting in-house. You can't wait until the month is over to find out the score. You need to know the score while the game is on. You need to run financial reports every week to check sales, expenses and cash flow. Compile a finished set of financial reports at the end of each month to comply with the taxman, as well as review and revise your financial strategy. The best way to do this is by generating basic financial reports in-house. Your accountant can support your efforts and check your homework.
An accountant may be able to train you on how to use your accounting software or recommend someone who can. You can also contact your accounting software company for a list of qualified trainers. Today's computers are so fast and accounting software is so simple, you can do this at the shop.
You need a good accountant. Most accountants just prepare tax returns but a good accountant will help you develop an accounting system that delivers the financial information you need to make good decisions. A good accountant will be excited when you tell him that you want to learn how to read and use financial reports. This person won't feel threatened when you tell him you want to move the accounting system in-house instead of shipping it out to him.
A good bookkeeper is meticulous about data entry and getting it entered on time. In a small company, you may hold the position of bookkeeper. This will serve you very well in the long run. Embrace the position. Figure out double-entry accounting and how to fully utilize your accounting system. When you are ready to hand off the position, you'll be prepared to work well with your bookkeeper to receive on-time, accurate and relevant information.
KFP exerciseSchedule a meeting with your bookkeeper and your accountant for sometime this week. Go through the balance sheet and income statement, line by line, account by account. Ask these questions:
- What do the account titles mean? (If you don't know what "retained earnings" or "other" means, ask.)
- Where do the dollar amounts come from?
- What do the dollar amounts represent?
- How does the information get entered into the accounting system?
Review how information moves through the company and ends up on the financial reports. Once, I worked with a company that had adopted a super timecard. The idea was to get all kinds of helpful information about how each technician at the company spent his day. The timesheet included spaces for each specific job and the time spent on the job; just perfect for sound job costing. Unfortunately, when the bookkeeper entered the data into the accounting system, it was all entered into one account: payroll expense. So, all that data was collected and then lost. Find out if that kind of confusion is happening at your company.
Work together to answer these questions:
- How can we structure the chart of accounts to better reflect how we do business?
- How can we separate information so that we know how different divisions of the company are performing?
- Should we create divisions in the accounting system?
- Are we tracking information that we don't really need?
- What will it take to generate current, accurate balance sheets and income statement reports at any time?
Finally, look over the month-end checklist together. I have included a copy here. This checklist makes sure that you stay in a KFP. Ideally, your bookkeeper completes the checklist. Your accountant can help by checking to make sure that your reports are accurate, and that all the legal and tax compliance requirements are handled. Commit to completing the checklist every month, starting right now.
Don't delay. Insist on meeting this week. Insist on getting to a KFP by the end of this month. It is that important.