3 Pillars of Financial Numbers

As an extension of a blog post I wrote a few weeks ago, I want to highlight 3 pillars of financial numbers, and what you should use them for in your company.

Pillar #1: Accounting

The first pillar is your accounting. This is the foundation, and you can't implement the next two pillars without first getting this one right. Owners can understand many important things about their businesses when their accounting is solid. Here are a few:

- timely accounting helps you plan accurate tax payments,

- looking at the trends of your accounting help prove your profitability, and

- well laid out financial statements (the things that accounting creates) can tell you who owes you money, and who you owe money to.

If you are not committed to keeping your accounting up to date, then you are already behind. Few business owners keep their own books well, nor have the acumen to make sure the accounting is being done properly.

Pillar #2: Metrics (or KPIs)

The second pillar is your metrics; basically, a mash up of your accounting. It's still your accounting, just simplified, with the most important parts highlighted. You can put your Key Performance Indicators (KPIs), or metrics, on a spreadsheet, written down on a piece of paper, or have them delivered to you weekly by your CPA firm on a dashboard. A full set of financial statements is rarely useful to a business owner, so savvy owners will...

- summarize the data

- choose 3 to 5 key pieces of information

- look at their metrics on a regular basis (e.g. weekly)

Pillar #3: Cash Flow

Reporting on your cash flow is perhaps the trickiest pillar of financial numbers that you should be looking at. This is where your numbers become predictive. It's hard to predict the future. Cash flow helps you look into the future and make guesses about where your accounting is headed. It's pretty tricky to do, and most accounting packages don't do this part well. You might be using a budget, but that's not the same thing as predicting cash flow. Most business owners make a budget one time, and then it remains static never to change again. But business doesn't work that way. Cash flow systems...

- begin with your past accounting,

- apply trends (like averages of your last month's data) to the future, and

- tell you what may happen to your cash if the past continues to happen in the future.

A few things to note.

First, you don't get any gold stars by being able to do your own accounting. I've heard of business owners going to a local community college to take QuickBooks classes. Don't do that. Don't work on being a good accountant. Just make sure someone you trust has the right knowledge to do it accurately and timely. If you can help it, and you own your own company, don't do your own accounting. I don't even do my own accounting.

Second, accounting must be accurate, but your metrics and cash flow do not have to be exact. You want them as close to exact as you can get them, but your metrics and cash flow are meant to help you run your business. You are looking for big picture trends that help you steer your company in the right direction.

Third, you need your data fast. If you must pick one, pick speed over accuracy of your data. I'm not talking about blatantly wrong information - I'm talking about anal retentive people who want to know if the Office Depot receipt last week for $4.56 was for Office Supplies or Project Expense. It doesn't matter. Tell your accountant to stick it somewhere and give you your numbers! You've got decisions to make!