7 mins to manage your company with just 7 reports.

7 mins on these 7 Reports will get you on top of your business (in ascending order of importance):

  1. Bank statement and bank reconciliation
  2. Trade debtors aging
  3. Trade creditor aging
  4. Cashflow statement
  5. Deal pipeline
  6. Profit or Loss
  7. Balance sheet

Many SME owners are busy running their businesses and spending majority of their time and efforts in getting the deals in, managing the staff, ensuring the delivery of operational team in meeting the timeline and quality, business compliance to labour, safety and regulatory requirements leaving very little time for the oversight of the actual business performance. How do you then be effective in ensuring the sustained business viability on the daily basis?

The key is to focus on what is the important aspects of the business that moves the nettle.

The first important KPI is to ensure that you have enough cash float to cover your daily cash outflows so that you do not have to face with a situation of a run by the creditors for payments. Late payments may trigger a statutory demand call by your creditors and thereby putting the continuing going concern of your business at risk. At its minimum, you would not want any adverse reputation impact to both your customers and suppliers that you are running a falling business.

So getting your eyes on that bank statements is paramount to ensure that your cash float is adequate to cover at least your next day payments. The frequency that you would need to eyeball the bank statement would depend on your nature of business receipts (Is this a payments in advance for services/product, at the point of the delivery of services or products or way after performance are completed). The later is the payments after performance, the higher is the possibility that you will incur payments for expenses (eg salaries, phone bills, utilities, delivery charges etc) way earlier than you will receive the payments from your customers. So for some businesses especially those with low cash float and fast moving sales, you may need to consider weekly if not daily access to the bank statement. The importance of bank statement and reconciliation have been discussed in the earlier article “The Magic of erasable ink and Bank reconciliation” 14/3/2019.

The second report that you need to get your hands on is the trade debtors aging. This report shows the amount of money that your customers owe you and how long these have not been paid by the various aging buckets – eg not due, 0 to 30 days, 31 to 60 days, 61 to 90 days and > 90days. These are the money sitting in your customers’ bank accounts and until these are paid, it will just not your money. So your job is then to chase for these amounts as you would as if it will evaporate the next day. There is a potential credit risk and this risk escalate exponentially once it hits beyond 90 days. You would rather that your customer pay you first over his other suppliers. The last supplier will run the risk that there is not enough left after your customer paid for the rest, for his dues. The distinction between invoicing your customer which ended up in your trade debtors listing vs cash is discussed in an earlier article “Invoicing and Revenue, Same Same but Different ?” 12/3/2019.

The third report is the one that you would defer payments as long as commercially possible without causing undue impact on your or your business reputation. It is a good business practice to settle your suppliers’ invoices on time so that you know exactly the cash float that is available. It is a tricky issue to push your luck and live your life at the edge by dragging that payments to the furthest end. This is not the way to run a sustainable business and definitely not to incur the wrath of your suppliers to limit or end the relationship or worse, proceed to serve you a court notice for payments or wound up your company (under statutory demand > $10,000).

Cashflow statement is the next important report which shows on a single statement where did you get your money (from sales or you are funding the shortfall) and where did all these  money gone to (paying for machineries, financing or as return by divdiend to your business). You would probably need to see this on a monthly basis, as using bank statement together with the trade debtors and creditors listing would have gotten you a quick view of what is your cash float and how would it pans out in the next few days or weeks with the receipts in trade debtors (if forthcoming) and payments (when you elect to settle).

The important of Cash is discussed in an earlier article “Cash is King” 11/3/2019 which highlighted the warning signs of cash deterioration not shown by the next 2 reports – profit or loss statement (statement of profit or loss and comprehensive income) and balance sheet (or statement of financial position).

The profit or loss report essentially shows you what did you make on a monthly or yearly basis taking into account the revenue recognition policy. Most businesses’ profit or loss report would be impacted by the new FRS115 on the the top line eg revenue and the bottom line, the profit or loss before tax. The impact of FRS115 has been discussed in an earlier article “Double Whammy phenomenon – FRS115 on revenue & FRS109 on credit loss” 27/3/2019. Most SME owners will be concern of whether this shows a historical profit or loss that is representative of how they expected the business performance to be, and the consequent tax paying position.

And last but not the least, the balance sheet shows you whether there is adequate assets to cover for current liabilities or total liabilities. Deficiency in current assets (current assets < current liabilities) indicates a short term liquidity shortfall, for which the inability to fund for the liabilities that are due within 12 months from the financial year end date may threaten the going concern of the business. The concept of going concern has been discussed in an earlier article “Many a time and oft In the Rialto you have heard going concern issue, So what is that?” 14/4/2019. In particular, if there is a deficiency in total current assets, the business is technically insolvent especially so if the total assets is also deficient (total assets < total liabilities). Although assets deficiency is common in startup and new businesses, the long term viability of the business is in doubts if there is no certain and committed funding from the shareholders or investors for the shortfall. Many businesses have failed to survived for the next day when it cash runs out or not forthcoming at the time that it is needed.
So if you only have that 7 mins, understand the story behind the financials in the 7 reports will get you that superman laser sight into your business.