Are your financials in good order?

Good griefwe're already halfway through the year!

By now, there is adequate data from your business to indicate whether or not you are on track to hit your milestones and goals for the year. You probably have a “gut feel” about things, and the raw data is there, but do you have the financial reports in good form so that you could prove your gut feel to yourself? Or anyone else for that matter?

Reports that justify how you think your business is doing are important for two reasons.

The first, and best, reason for good financial statements is so that you very well understand your own business. I can remember the first time I ran an eye down the accounts and saw total spending for a certain category. “I spent that much on that?!” I really had no idea. It was a normal part of running my business, but seeing the number made me realize the need to rethink the process behind the expense.

Here's the next best reason. Good financial statements are critical to justify your financial accuracy and stability to an outside party. That may be for a bank loan, potential investors, or an auditor.

Relying on bank statements to run your company can lead you astray, sometimes to a disastrous degree. Thinking the bank balance is what you can spend is usually false, because it does not take into consideration what checks are outstanding, and you may spend more than what is actually available.

Or let's say you receive a loan from a friend or family member and deposit the money. Relying solely on bank statements, and without your proper documentation and financial accounting of the loan, the IRS can decide it should be counted as income and should be taxable! You'd then have to produce the loan documents (that would, hopefully, have been drawn up at the time of the loan and not as a result of this problem) to prove the deposited money was not income, and therefore not taxable. The sheer amount of time it would take to communicate and convince an auditor, not to mention the stress of the situation, would have been saved many times over had the loan been recorded correctly at the time. And as one who has seen numerous audits of many kinds, I can tell you that once an error is found, the auditor will dig deeper and harder looking for more, because there usually are.

Similarly, bankers know that bank statements do not tell the whole story, so they would require additional information to even consider making a loan. The income statement would tell them what your revenues and expenses are, and the balance sheet would show assets the company has, as well as what other liabilities you may already owe.

If you're not sure you could come up with financial statements, it could be time to talk with an experienced bookkeeper to help you produce them, or to advise you in setting up a process for you to follow yourself.

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