The ultimate goal of a business is to make money for the entrepreneur. On the way to attaining this goal, there are many things that you must do in your business which includes, producing the service or product, selling, managing your customers and keeping financial records.
Record keeping sometimes referred to as bookkeeping is an integral part of a business and these records are the mirror that you look into to know how your business is performing.
Once you have your records in place, the next important step is to use them to improve your business. This entails pouring through the numbers to understand the patterns and trends that the records reveal.
For you as an entrepreneur, there are two reasons why you want to go over your business accounts;
- To check that they are accurate; reviewing your accounts allows you to make sure they give a fair reflection of the state of your business, which will help to highlight any weaknesses and areas for improvement, for example, you will be able to note the missing records, vouch estimates used and even assess how stock is being managed.
- To compare performance; when accounts are compared with previous years or with your competitors, they can show unique trends and help you learn from other businesses in a similar position to yours.
Business accounts should be reviewed at least every quarter.Reviewing your accounts allows you to make sure they give a fair reflection of the state of your business Click To Tweet
What to look out for
There are some important things to look out for when reviewing accounts.
On the income statement check whether the business has made a profit in the year and whether revenue or costs has gone up or down compared with the previous year?
The balance sheet will tell stories about how much money is in the bank. Remember, from the Cash is King article, we discussed why money should be available. The balance sheet will also gauge whether cash levels are moving in line with profit?
On the balance sheet, you will be able to note if the stock level is reasonable and also whether there are any big payments due soon in terms of loan repayment or large invoices. When analysing business accounts, ensure there is nothing that is obviously missing and use ratios to help you to compare and contrast the performances of businesses.
Comparisons can be made internally with past performance or budgeted results or externally with competitors or industry averages. It is good practice for the accounts to be independently reviewed and you can one or more of the following people to do this on your behalf:
- Any person other than yourself
- An accountant or
- An auditor
In our ‘Reviewing Financial Accounts’ guide, you’ll find a section on key ratios for analysing business performance. It will provide you more information on how to go about reviewing your accounts. Download our guide on reviewing financial accounts here.