More sales is not always more profit. More profit is not always more wealth. Where are the earnings shown by the Financial Statements? It is one of the most frequent questions asked by my clients, when they see that the Income Statement presents earnings; but the funds are not enough to fulfill all the company's commitments.
How does this Accountant say that there are profits if I have liquidity problems to pay all my bills?
It is unfortunate, but I too often encounter medium and large companies with large operations; but with entrepreneurs with very little timely, reliable and useful financial information for decision-making and managerial control.
It may be carelessness of the same businessman, because the day-to-day operations absorb it.
The employer appropriately delegates the financial part to a work team. That department of the company is the Accounting Department or Financial Division, depending on the size of the company.
This work team made up of the Chief Financial Officer (if the company is medium-large), the General Accountant, the Treasurer and the Accounting Assistants, must be committed, capable, competent, disciplined, focused and responsible people for the desired results.
The financial information that these people prepare for the entrepreneur, for the Board of Directors and for the partners of the company must be, as I said before, reliable and timely.
The quality of the decisions you make as Manager of your company, completely depend on the quality of the information you have available. Bad information, bad decisions.
In this short article, I want to present in a summarized and simple way the three main tools that Accountants must deliver each month, to support decision making and managerial control.
In my book "Finances for Advanced Entrepreneurs" (I will notify you when available) I present these tools in more detail, as well as other information and management control mechanisms
Balance of Financial Position
It is a report that the accountant of your company must prepare.
It details the different assets or assets of the company in a pre-established order:
- Cash and bank balances Accounts Receivable Inventories Land, property, machinery, equipment, etc.
It also presents the obligations that the company has with third parties:
- Accounts payable to suppliers and others Debts with the government and its institutions Bank loans.
Finally, it presents the capital contribution and equity of the company:
- Capital stock subscribed and paid
Extraordinary contributions made by the partners.
The accumulated profits of the company, which have not yet been withdrawn by the partners.
This information is very valuable for partners, because it allows them to know the "book value" of the company. By comparing one accounting close to another, they will know if the company is improving and increasing in value.
The company's Accountant must certify this information.
I always recommend auditing the accounting, especially when the companies are increasing in size and there are several partners.
Of course, this financial report is essential even if the company has only one partner.
Statement of income
In this report, partners will know if the company is profitable. Officially, the Accountants must present it annually together with the Balance Sheet; but my recommendation is that both this and the previous one be made and presented to the members every month.
The information corresponds to a period: a month, a year.
It shows the following:
The net sales of the company.
The Cost of those Sales
Variable operating costs
Contribution margin or gross profit.
Fixed sales and administrative expenses.
Financial expenses
The Net Income of the company.
The tax on profits.
The Utility for partners.
That profit will not always be in cash or in current accounts; but it does show:
- The efficiency with which the business is managed The operational profitability The return on investment.
The Income Statement shows the profits or losses of the company. During the year the results vary, often drastically. First due to the variability of sales, then to the contribution margin and often due to extraordinary expenses.
Comparing one month against another, however, is always helpful. Better yet, when you compare the same month this year with the month before.
The Accountant of your company is the one who must present and explain this information widely.
Cash Flow Statement
Accountants do not usually present this financial report.
In my opinion it is equal to or more valuable than the previous ones.
I tell my clients the following: “More sales, it's not always more profit. Real wealth occurs when profits are converted into cash flow. "
Accountants who certify or dictate the accounting of a company, prepare a report that has several names:
- Statement of Origin and Application of Funds. Statement of Changes in Financial Position.
Both are very useful; but for those of us with extensive financial training.
For entrepreneurs, I recommend Cash Flow.
It shows how money was handled in the company, for a period: one month, one year.
Of course, I recommend that you receive this report every month.
Furthermore, the Management Committee must receive it every week.
Contains the following:
Cash Income
- For cash sales For recovery of accounts receivable For contributions from partners For loans from partners to the company For bank loans
Cash Outlays
- For cash purchases, for payments to suppliers, for payroll payments to workers, for payment to the government and institutions, for payment of various expenses, for payment of interest and amortization of loans that the company has, for payments of profits to partners.
Bank account balances and cash.
Within my experience I have seen the usefulness of all the financial reports explained; but the latter continues to be so par excellence.
The entrepreneur needs to know where is the money?
If you are the owner of your own company, if you are a partner with others of a growing company and you are not receiving this information, you must rethink your Accounting or Financial Department right now. Do not be impressed because they pass very "busy and full of papers". Take action right now. Make sure, through an external Audit and Consulting that your people are qualified to get where you need them.
Do what you have to do to receive valuable information.
If you are an accounting professional and are reading this article, I congratulate you. It is a sign that you have a desire to grow in your career. Remember that the mission of your work is one, the rest is the means: "The mission of the General Accountant of a company is to provide the entrepreneur with reliable, timely and useful financial information for decision-making and managerial control."
