Why do you need to review your financials every month? Many business owners get their books together at the end of the year when tax time comes. Below are 5 reasons why it is crucial to review your financial statements on a monthly basis.
Let me preface this post by saying that I strongly suggest that you review financials on a monthly basis, regardless of the current size of your business. Some businesses should actually review them bi-weekly, weekly or even daily. If you aren’t sure how often you should be reviewing yours, speak with a professional. Also, make sure you have someone in place to ensure your financial statements are accurate. If you are reviewing inaccurate financial statements, it can cause more harm than good.
1. Reflect on the past
Current, accurate financial statements paint a picture of how your business has fared over time. While past performance doesn’t always predict the future, it is helpful to review the past to analyze a multitude of decisions that were made. For instance, if you want to determine which business lines were most profitable over the past three years, you need to have accurate financials to assess what is working and what is not.
2. Understand the present
Ever hear of the term “flying blind”? If you don’t have a good grasp on the financial health of your company, in essence you are “flying blind”. You may be able to get away with this for a while but eventually you are going to “fly” into something you didn’t see coming. It’s time to get your books together and start using them as a tool to help grow your business.
3. Predict the future
I can promise you that if you have no idea where you are, you also have no idea where you are going. I am sure as a business owner you have a vision of where you want your company to go. A huge aspect of this vision needs to be the financial piece. By having an accurate set of financial statements at your fingertips, you will be able to more precisely plan your future.
4. Informed decision making
Let’s say you have a big decision to make regarding your business. Maybe you are thinking about buying a new piece of equipment or stocking up on some inventory. Don’t you think it would make sense to see how this decision would fit into your financial puzzle? If you don’t have accurate financial information to back your decision, you are merely hoping for the best. Again, this is something that you may get away with a few times, but in the long run it simply doesn’t work.
5. Tax planning
Taxes can eat up 30-40% of your bottom line. Given that, I would say this is something you want to have a solid handle on. One thing every business owner needs to do is look at every business decision from a tax perspective before it is made. Sometimes there are ways you can structure transactions in order to limit the tax liability. A great deal of business owners wait until a transaction is complete before analyzing. By not being proactive, it’s possible you could have cost yourself thousands or even hundreds of thousands of dollars. It is vital to have a professional analyze a transaction before it is consummated, even if it’s just a brief review.
How often do you review your financial statements and why?