Written by Tim Sernett, Accounting & Finance Advisor for SMBs | Owner at Financial Optics Inc | Entrepreneurship enthusiast | Dad | Sports nut | Tuition paymaster
Why are business owners so focused on year-end financial statements?
It’s the one time of year all businesses think about closing the books and generating a clean set of financial statements.
As business owners, most of us toast in the New Year by thinking about what we accomplished the past year and what we hope to accomplish in the coming year.
A big part of that is the push to close the financial books on last year and to answer some questions, such as:
- Did we reach our revenue goals for 2016?
- How much profit did we generate?
- What is our taxable income and how much income tax will we owe? (And the biggest question for some at this time of year: Do we have enough cash to cover the tax liability?)
- Is the business generating positive cash flow?
- Are we in a better financial position than we were a year ago?
So what’s the significance of year end?
It’s simply the calendar-driven thought process of measuring financial results. We all tend to think in time intervals driven by years, quarters, months.
In the small business world, I can tell you that year-end is the one time almost all business owners actually think about financial statements and financial results. A lot of that is driven by our income tax system and the need to be in compliance.
But are annual financial statements enough to measure the financial success and progress of your business?
No, they’re not. And producing the ‘accurate’ financial statements once a year to simply be in tax compliance just isn’t the right emphasis.
I have to admit, though, I use the tax compliance motivation to get cooperation from some of our clients to finally get closure on some financial details that we may have been asking about for months. 😉
Sound financial management of your business can’t happen if year-end is the only time of year there’s an emphasis on producing complete, accurate and clean financial statements.
But how often is enough? In my opinion, as soon as your business becomes more than a solopreneur, you should be generating monthly financial reports. If you have a team of more than five people, some financial results should be reviewed weekly.
Let’s take a look at the questions asked above, but broken down further into monthly results:
- Did we reach our revenue goals for last month?
- How much profit did we generate last month?
- Were we positive cash flow last month?
- What is our tax liability on year-to-date results?
- Are we in a better financial position than we were a month ago and at this time a year ago?
Those are just a few of the high-level questions to be analyzed monthly, with deeper analysis specific to your industry and business size. Additionally, if you have a sound bookkeeping and accounting system in place, whether outsourced or internally, weekly analysis shouldn’t be out of the question.
Closing the books on the year shouldn’t actually be a big deal.
With good systems in place, closing the books on the year shouldn’t be much more effort than closing the books on any given month. Sound financial management of your business requires monthly and weekly analysis.
So it’s time to get onboard…because once a year doesn’t cut it.
Thank you for taking the time to read the Financial Optics blog! If you have any questions about this post or any other questions, give us a call at 913.649.1040.