Numbers People in Action: Basic Finance

August 13, 2009, 12:05 pm

Small Business Finance & Profitability

By William Stong

Another continuation of the suggestion that came in to “…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…” The first article set up the simple scenario, the second dealt with Accountants & Bookkeepers. Now, it’s time for Finance.

Once the close is completed, the Finance Folks grab the numbers-baton and start running. The first step for Finance is to review the numbers from the general ledger close. The purpose of the review is to do a high level check as to whether the numbers “make sense,” whether they past the tummy-test. If something looks out of the ordinary, or outside expectations, Finance will immediately go back to the Accountants and ask for confirmation that the abnormality is accurate: that is, the numbers are an exact reflection of a business transaction.

For example, let’s say sales have been running at $XXX a month for the last six months but this month, they are only 50% of that number (or, better, 150%!). Before involving the Accountants, Finance will first check comparable periods in prior years. If there IS an annual dip (or bump) in sales in this particular month, then there is no question. It is a normal part of the business. If not, the details need to be obtained from the Accountants (who certified the close).

The second step for Finance is to report what happened during the month—at least as far as the numbers show. There is a broad continuum in the quality of this reporting, from the most basic through to top-notch, business-linked explanations. This article will focus on basic reporting. More insightful, useful reporting will be covered in later articles.

Basic reporting, from general ledger accounting lines, describes what happened within the business in terms of revenue, expense and the all-important net-profit. Reporting also covers what happened with assets, liabilities and capital. Basic reporting, especially for small businesses, should include Cash Flow.

For example, the report will cover how revenue has performed. If it has gone up (or down) and there is more than one kind of general ledger revenue (e.g., sales of products vs. investment income), these should be highlighted and discussed separately. Likewise with expenses. On the Balance Sheet, changes in assets and liabilities in the right direction should be highlighted. (e.g., cash is increasing; inventory is not ballooning; debts are not expanding; capital, which includes retained earnings, is increasing). If the Balance Sheet accounts are moving in the wrong direction, Finance needs to dig deeper and understand what is causing the negative moves.

Up Next: digging deeper.

Bill

William A. Stong

Email: william.a.stong@gmail.com

SBF&P # 38