LACK OF RELIABLE FINANCIAL INFORMATION
It is not uncommon for owners of smaller businesses to operate without accurate and timely financial information. Many figure that close enough is good enough, believing that money in the bank and decent revenues are sufficient indicators of financial health. But those alone don’t help us achieve the company’s two top priorities: (1) Increasing Net Worth (Assets – Liabilities) and (2) Having plenty of Cash (Liquidity) available to pay obligations as they come due.
Too Many Assets
We are told that Assets are good but in reality all Assets other than Cash are undesirable. We’d be much better off if we could run our business with no Accounts Receivable, no Inventory, and no Fixed Assets. Assets use up Cash.
Accounts Receivable are effectively Cash loans to customers. If we don’t keep a watchful eye with good reporting they can expand, age and eventually become uncollectible. In this process not only do we divert Cash to fund Accounts Receivable but we eventually lose Cash permanently from write-offs.
For product companies an additional challenge is Inventory, a big use of Cash. Inventory levels can become bloated because there’s too much of the right thing or, worse yet, too much of the wrong thing. And eventually obsolete Inventory is written off which removes Cash permanently.
With accurate and timely reporting we can usually avoid these Asset problems.
Too Many Liabilities
When Cash gets tight it’s possible, up to a point, to get more by borrowing money. This can be done in obvious ways like going to the bank or in less obvious ways by letting credit card balances grow, slowing payments to vendors, using customer deposits or, worst of all, delaying tax payments.
If we don’t have accurate Liability reporting we can be lulled into thinking all is well when in fact we’re funding our business with borrowed money that increases our Liabilities and reduces our Net Worth. Over time, if this continues, we can’t borrow any more and are left unable to fund required Assets and cover Expenses. Again, the problem can be mostly avoided when we get accurate and timely financial reporting.
Although this is not an exhaustive analysis I hope you’re now more motivated to step up your financial reporting (and literacy) game if it’s something your company needs.
