How much visibility do you have into your business’s finances? If you have gaps or blind spots, you could be missing valuable opportunities to improve your processes and become more profitable.
Even if you conduct financial statement analysis on a regular basis, you’re missing a step if your data doesn’t reflect your financial standing accurately. Financial visibility is the goal, but you need to have a strategy in place to achieve it.
Understanding Financial Visibility
For business entities like S corps or sole proprietorship in California, financial visibility is vital to addressing the unique tax and reporting requirements. This gives you a crystal clear view of your business’s financial standing, including your cash flow, expenses, and income. Without this knowledge, you could be mere months or weeks from running out of money.
With financial visibility, you have a comprehensive view of your finances to make informed decisions and stay agile amid market shifts. You can also identify new and lucrative opportunities as they present themselves.
Where Is Your Financial Visibility Right Now?
Before you can improve your financial visibility, you need to see where you stand at this moment.
Review Your Balance Sheet
Your balance sheet holds key information about your operational efficiency in the form of your assets and liabilities. It also has shareholder equity, which is valuable if you’re seeking capital or working with investors.
Consider Your Assets and Liabilities
Assets and liabilities are divided into current and non-current items. Your current assets have a lifespan of less than a year, and your current liabilities are the financial responsibilities you will need to address by the following year. This could include money owed in taxes, to short-term lenders, or to suppliers. You can manage your liabilities by managing your cash flow.
Non-current assets are the assets you own, which may include intellectual property, land, or other assets. Your non-current liabilities are what you have borrowed that will need to be paid back, but you have a longer time frame. A good example of non-current liabilities are deferred tax payments.
Evaluate Your Current Ratio
The current ratio is calculated by dividing your current assets by the total current liabilities for your financial analysis. Consider benchmarks in your industry to see where you stand. Note if you’re banking a lot of cash or on the verge of insolvency, both of which can be a sign of trouble for your business’s financial standing.
Understand Book Value
Book value is derived from subtracting your total liabilities from your total assets. This is how you can determine your business’s profits that were brought in and retained. It’s also valuable for investors, as it shows the shareholders’ stake in your business.
Strategies to Achieve Financial Visibility in Your Business
Once you understand your metrics, you can take steps toward financial visibility.
Use Data to Your Advantage
Data is paramount to true financial visibility and informed decision making. You should set up systems to track your expenses and cash flow in a centralized location for easy reference and a big-picture view.
It’s imperative to have clean, high-quality data. Some accounting platforms have data analysis tools to ensure this, but others lack the features to prioritize the data you need and may include irrelevant information. For example, data like a PoS on a bank or student credit card statement won’t do much to help with financial visibility.
Close the Gap Between Information and Analysis
If you’re not keeping up with your expenses, you could have gaps in your view of your finances that can be a problem later. For example, if you allow employees to make business-related purchases and then reimburse them, you could get behind on understanding what you’re truly spending.
Having an accurate analysis requires topical, relevant data that provides current information on where your business is now. As data ages, it becomes far less useful for your decision-making process, especially with finances. Get as much real-time data as possible and institute systems that track current spending, ensuring you’re not catching up months later and overpaying on your taxes.
If you’re still using manual processes like tracking information on a spreadsheet, you’re wasting your resources and risking errors. One example of this is accounts payable, which often has a long process of preparing invoices, going through approval, starting the payment process, and tracking payments. This leads to a lot of administrative burden and wasted resources that could be better spent elsewhere, as well as possible errors with wide-reaching ramifications.
Automation allows you to eliminate all of your manual tasks and relieve your staff. You’ll also have better reporting with fewer errors from gaps and blind spots.
Eliminate Information Silos
Looking at isolated data, such as a standalone metric, doesn’t help you understand your patterns in context. You could miss vital information that may inform your decision-making process.
You can encounter barriers to data access that lead to information silos, such as poor data portability, and some solutions don’t offer features to address this. Consider whether you’d be better served with a more comprehensive and targeted solution.
Get a Big-Picture View
All of your metrics and key performance indicators (KPIs) are essential to your financial visibility, but you have to look at them collectively. Data management with features to support different channels, products, and departments ensure you have the context for your data to understand it clearly.
With all the information at your fingertips, you can identify clear patterns that factor into your cash flow and profits, whether directly or indirectly. Only then can you make better decisions for your future.
Establish Systems to Support Financial Visibility
Financial visibility is the secret ingredient for business success. Still, many business owners lack the systems needed to provide a comprehensive view of their business’s financial standing and make informed decisions to fuel future growth. Building a foundation around financial visibility with strong data, accurate reporting, and good communication can provide insights to support your financial health.
Name: Shahar Plinner
Shahar is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy. That’s why he founded Formations, to make sure the self-employed never overpay on taxes again.