If you were driving 80 miles an hour, in the dark, with your lights off, heading towards a cliff, would you like someone to yell, “STOP?”
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. This is the year. This is the day. From here on out…you are going to KNOW.
Get to KFP.
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 deeper in debt than you would like to be. 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 ten 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 ten who runs, reviews and understands financial statements, congratulations!
If not, well that’s going to change starting today.
Learning how to keep score
You’ll be at a Known Financial Position 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.
I strongly recommend that you 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. You should compile a finished set of financial reports at the end of each month to comply with the tax man, 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.
Your 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 the accounting at your shop.
However, you are going to need some help to get to a KFP.
You need a good accountant. Most accountants just prepare tax returns. 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. A good accountant 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.
Getting to KFP Exercise
Schedule 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 means…ask. If you don’t know what “Other” stands for…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 very complex time card. The idea was to get all kinds of helpful information about how each serviceperson at the company spent his day. It was a huge effort, but ultimately every serviceperson was recording sales, lost sales, billable hours, non-billable hours, average sale, add-on sales and travel time. Great data!
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