Case studies show that one of the primary reasons for small business failure is the lack of poor management tools and techniques. When it comes to the accounting and financial reporting, business owners are more successful when there is a set of procedures to follow. This article provides five steps to management accounting to ensure that you get good results from financial reports.
Step 1: Source Documents. Many business owners have a habit of making purchases and failing to keep their receipts. But an important part of accounting is maintaining source documents. They are a vital piece of the financial puzzle because they tell you what, where, when, why, and how money flows in and out of your company.
Step 2: Accounting Systems. The receipts that you have should be recorded for better management. Use an accounting system to help you accomplish this task. There are three types of accounting systems that you can use. Depending upon your preference and the level of complexity for reporting needs in your business you may select from a manual, spreadsheet, or an accounting software to fit your needs.
Step 3: Financial Reports. After entering the financial transactions for your business the next step is to create financial reports. The type of financial reports that owners use in business varies. At minimum you should produce a Balance Sheet, Income Statement, and Statement of Cash Flows each period.
Step 4: Management Review. Your financial reports will give you an account of the progress you are making in business. Each report provides different information to help you assess the financial decisions and how they impact overall performance. For example, the Balance Sheet can provide answers such as: How much cash is available?; How much debt is the company carrying?; and What is the net worth of the business? Likewise, the Income Statement and Statement of Cash Flows illustrate the details to address questions that involve business growth and sources and uses of cash.
Step 5: Course Adjustments. It is common for business owners to take action using your “gut instinct.” This is where you have a strong feeling for how well or poorly you have performed without having numbers to back up your assumptions. But when you take a look at the actual data it can be an eye-opening experience. Use the results from financial reports to leverage opportunities to improve and grow. Remember to establish measures and track progress over time to see how assumptions and decisions impact sales, expenses, and the bottom line.
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