Your Books Are More Than Just for Taxes
As a CPA, I’ve seen many business owners surprised by their financial results at year-end. Often, bookkeeping is viewed only as a means to file taxes. But your financial statements are more than that—they’re powerful tools that can guide your business growth.
In this blog, I’ll explain the importance of regularly reviewing your financials to uncover key insights, spot trends, and make smarter decisions that keep your business on track. Let’s dive into why frequent financial reviews matter and how you can use them to improve cash flow, plan for the future, and avoid year-end surprises.
Unlock the Story Behind Your Financials
As a CPA in public accounting, I’ve encountered numerous business owners who were surprised by their annual earnings or losses after I corrected their books. Many small business owners only see bookkeeping as a means to file tax returns at year-end, often catching up on months or even a year’s worth of records at once. If this sounds like you, it’s time to change that mindset! Your financial statements are much more than just tax documents.
Your financial statements tell the story of where your business has been, where it is now, and where it’s heading. While it might take some time to fully understand this, it won’t be as long as you might think. You know your business better than anyone else, perhaps even more than you realize. You just need to tap into that knowledge and compare it to your financial data. It’s always easier to address issues as they arise rather than trying to fix them retrospectively at year-end.
Stay Ahead: Regular Financial Reviews and Proactive Cash Flow Management
Review your financials frequently, ideally daily. Compare the current month with the previous month or the same month last year. Most accounting software allows you to view your income statement (P&L) monthly. Use this to identify trends from previous years (e.g., does your business typically pick up in November? By what percentage?). Use these trends to project future performance and ask yourself questions like: Am I on track compared to previous years? What is my total expense percentage relative to total revenue? How does this compare to past periods? If there are changes, investigate the reasons (e.g., rising costs without corresponding revenue increases, large purchases, or even potential fraud).
Frequent financial reviews can help you uncover opportunities that might otherwise go unnoticed. For example, consistent profitability could signal the right time to expand your business, launch new products, or invest in new technology. Regularly reviewing your profit margins may reveal areas where cost-cutting or pricing adjustments can lead to higher profitability. You might also find that certain products or services are performing exceptionally well and could benefit from additional resources or marketing.
In addition, these reviews help you spot potential risks before they escalate. For instance, an increase in accounts receivable may indicate that customers are taking longer to pay, potentially leading to cash flow problems. Are your expenses creeping up while revenue remains flat? This could be a sign that operational inefficiencies need to be addressed. Spotting these issues early allows you to pivot quickly and avoid financial stress, keeping your business on solid ground.
Never forget to keep a close eye on your cash flow. As the saying goes, “cash is king.” Have a plan for what to do if your cash reserves dip too low. Do you have a line of credit available? While zero debt can be beneficial for personal finances, businesses sometimes benefit from taking on debt rather than depleting cash reserves. For example, if purchasing machinery will generate more revenue than the loan payments, it might be better to finance the purchase now rather than waiting to save up. Also, maintaining adequate cash reserves is crucial for handling emergencies.
Use Financial Statements to Set Business Goals and Measure Progress
Your financial statements don’t just reflect what has happened—they are also powerful tools for shaping the future of your business. By regularly reviewing your income statement, balance sheet, and cash flow statement, you can set measurable goals and track progress over time. For example, if you aim to increase revenue by 15% next year, reviewing past trends and identifying the key factors of your business will help you develop a realistic action plan. Are there periods where sales tend to slow down? Can you ramp up marketing efforts or introduce promotions to combat seasonal dips?
Your balance sheet can highlight your business's financial health. Are your assets growing? Is your debt manageable? These insights provide the foundation for setting long-term goals such as expanding into new markets, purchasing new equipment, or hiring more staff. Financial statements help you gauge whether you're ready for these investments or need to stabilize cash flow first. When you regularly analyze these reports, you gain clarity on what’s working and where adjustments are needed, so you can make informed, strategic decisions.
In Conclusion
Your financials are a goldmine of insights that can guide both your everyday decisions and long-term strategy. By using them to identify trends, set goals, and monitor risks, you can ensure your business stays resilient and ready for growth.
Don’t hesitate to ask your trusted advisors questions. While many CPAs charge by the hour, a quick 15-minute conversation during the year can prevent hours of work and higher taxes at year-end. In fact, if it’s a very brief question (say, 5 minutes or less), many accountants might not even charge you. You’ve got this – keep your head high!
Key Takeaways to Remember
Surprise in Earnings/Losses often happen to many business owners after book corrections.
A Bookkeeping Mindset is beneficial as small business owners often see bookkeeping only as a means to file tax returns, catching up on records at year-end.
Change your Mindset to start seeing that financial statements are more than tax documents; they tell the story of your business’s past, present, and future.
Understand your Financials so that you know your business better than anyone else.
Be Proactive in Issue Resolution by addressing issues as they arise rather than fixing them retrospectively at year-end.
Frequently Review financials, ideally daily. Compare current month with previous month or same month last year.
Identify Trends using accounting software to view monthly income statements (P&L). Identify trends from previous years.
Project Future Performance using trends and ask relevant questions about your business’s track.
Investigate Reasons for Changes in your financial data (e.g., rising costs, large purchases, potential fraud).
Cash Flow Management must be regularly reviewed; have a plan for low cash reserves and consider the benefits of debt for business.
Emergency Preparedness should involve maintaining adequate cash reserves for handling emergencies.
Seek Advice often and don’t hesitate to ask trusted advisors questions; quick conversations can prevent extensive work and higher taxes at year-end.
Basically, simplify your COA, review financials often, and make informed decisions. You’ve got this!
Additional Resources to Learn More
QuickBooks Resources - offers articles and webinars that explain how to use accounting software to manage finances, track business performance, and analyze trends—not just for tax filing.
