Posted by HMFRS | December 17, 2014
In order to make good financial decisions, one needs accurate records in real-time to monitor the business appropriately.
It used to be that financial statements and relevant accounting information would not be available until the end of your financial year. You would provide the detail, and your accountant would pull this together into the required reports for you to review. Decisions then would be made, but they would be 12 or 18 or even 24 months behind.
Real-time accounting information means that your company can see the true picture of your accounting, at the moment you need it.
Cloud accounting systems such as Xero allow you to review your accounting information any time of the day or night. On your smartphone, during a meeting, immediately after signing up a new customer.
But what kind of information do you need so that you can make good decisions?
We will look at four areas.
The three key questions are:
- How much cash is available for operations?
- How much cash is needed to cover expenses?
- How much cash is coming in?
All of these questions are answered by looking at 3 accounts:
- Cash in real-time (rolling bank reconciliation)
Most companies are constantly reviewing cash. A rolling bank reconciliation shows much more than simply “how much cash is in the bank”. It shows the bank balance less outstanding checks plus deposits in transit.
This is the true number that tells you how much money is available to cover your future expenses.
- Accounts receivable (A/R) Aging
This report shows you how much and when money is due to come in.
This report is presented by how many days your accounts receivable is outstanding. How long has it been since your customer was due to pay you, and still has not? This number is critical to review – for some companies, on a daily basis – so you are on top of your slow paying customers.
- Accounts payable (A/P) Aging Report
Your A/P aging tells you:
- How much you owe
- To whom you owe it
- And when you have to pay them.
This is important to help project your cash flow – looking at when cash will come into the business (item 2 above), when it will leave the business (item 3), and how much you have for future expenses (item 1).
All of these reports are very useful in keeping on top of your cash, but they are only reliable if they are current and if your bookkeeper is recording your transactions correctly.
If you have a credit agreement, then it is likely there are covenants that you need to adhere to.
Common financial covenant requirements are Current Ratio, Tangible Net Worth (“TNW”), Debt to TNW Ratio, and EBITDA.
If the borrower does not stay on top of their financial covenant calculations and they fail to meet the minimum requirements then they will be in default of their loan and be required to reclassify the loan to current and the lender can call the loan.
Accurate and real-time financials allow the tax guys to assess tax liability and plan for possible deductions/credits and estimated payments.
If they do not see the true picture then it is hard to estimate your tax bill.
Most companies prepare budgets annually. With real-time financials it is easy to compare your budget line items to actual amounts to judge where you stand.
By monitoring your budget to actual for key expense/revenue items you can tweak spending if and when it is needed.
How will you make good decisions?
If you are going to make good decisions with your financial information, then it had better be the best, most accurate, most real-time financial information there is!
If it would help, request regular information about financial statements for your business.