Financial reporting is essential to business success. However, reporting can help only when companies can understand what their financial and accounting information are trying to tell them.
In a perfect world, company owners, accountants, and finance managers will be able to make complete sense of what their cash flow, fund flow, P&L, and balance sheets are telling them. But this is not a perfect world. Financial reporting and understanding of financial information is a major challenge for most small businesses.
Unfortunately, misinterpretation of financial reports can have devastating and far-reaching consequences for companies. Not only will you be unable to identify red flags, but you will be unable to implement the changes that are necessary to set things right with your company.
In fact, research by Wall Street, Inc. and other reputed sources confirms that 65% of businesses fail within the first five to eight years of starting operations because of limited financial literacy. This is an alarming statistic.
The only way to ensure that you don’t become a part of this number is to actively educate yourself about your company’s finances and seek accounting advice from professionals. But before doing this, you need to understand what financial roadblocks small businesses can face and how to overcome them.
Seven top causes for corporate financial failures and how to solve them
1. Poor financial budgeting and planning before the start of the project
Many entrepreneurs under-budget their start-up cash requirements. When this happens, they don’t have enough cash in hand to meet their start-up expenses. Then they either forego certain activities or try to find low-cost (and sometimes poor quality) alternatives.
Proper research about your small business start-up requirements can help you budget how much liquid cash you need to keep. Speak to a fellow entrepreneur or read guides about setting up a business to get information.
2. The fast depletion of the company cash reserves
Maybe you have enough cash in hand, but you tend to overspend. This will deplete your financial reserves very quickly, and soon, you’ll be stretched for cash.
A well-planned budget, with proper financial allocations for each activity, can help you save. Plus, you need to identify which activities are essential for your business and which aren’t and eliminate/postpone the non-essential activities.
3. Limited understanding of financial statements
Financial statements include the cash flow statement, fund flow statement, P&L account, and balance sheet. Before you start your business, you must contact a qualified accountant or a financial planner and understand what each of these statements means, and why they’re important. In fact, hiring an accountant is the first thing you need to do when you set-up your small business. This individual will help you prepare and understand your financial statements.
4. Miscalculating or not calculating profit margins
There are different types of margins in finance – sales margin, profit margin, contributing margin, and so on. Each is calculated differently, and each paints a different picture of the company’s financial standing. Many entrepreneurs either make the mistake of not calculating these margins or miscalculating them.
The best way to avoid margin-related financial mistakes is to hire the services of an accountant. He/she will be able to calculate the right figures and give you the right results.
5. Poor growth management
Another common mistake that business owners make is that they wrongly estimate their company’s growth potential. In this case, one of two things happens; either you won’t plan for the financial resources required and stall your growth, or you scale so quickly that you’re unprepared to bear the expenses of the growing business.
Making growth projections before setting up the business can help you get a clear idea about the type of growth you need to aim for. You can use these inputs for sustainable business growth.
6. Improper borrowing practices
Knowing when to borrow and from whom is essential to financial success. The right type of borrowing will not only bring you money, but it will reduce your liabilities too. So, study up about your various financing options – personal investments, stocks, dividends, bank loans, government schemes, and so on. Your financial planner or tax consultant can give you information about the options that work well with your business plans.
7. Poor planning for project completion
Most of us like to believe that our business survives forever. But this is often not the case. That’s why you need to place measures for liquidation and funds disbursement in the event you close down your company. But the sad truth is that a lot of entrepreneurs fail to do this.
So, start collecting your outstanding payments, sell your assets, and use this money to make your payments. File your papers and ask your tax consultant for advice. Get the most out of your financial information with these tips Your company’s financial reports are the window to your future. It’s important to understand what these numbers mean so that you’ll be able to make better decisions. So, to help you, here are a few tips you need to follow to analyze and interpret your reports better: · Focus on understanding the elements of the income statement and balance sheet. They are the two most important financial statements for your company. · Keep an eye on financial or economic trends, both in your country and globally, since they impact your company’s financial results. · Ratios are an excellent tool for understanding your financial standing. Use them to check what your unique strengths and weaknesses are and what financial opportunities you can leverage. Key takeaway So, focus, analyze, and understand each number in your financial reports
