Critical Information on Which to Base Your Business Decisions

Related posts on financial aspects of a small business operation

1.      Basic Financial Aspects in Every Business

2.     Critical Information on Which to Base your BusinessDecisions

      Financial Statements

3.     Getting Value for your Manpower - Tracking and Forecasting

4.     Business Control Gauges - Monthly Management Report

Statistically, small businesses have a high failure ratio.  One of the main reasons is their inability or willingness to keep and understand proper financial records.  This is doubly true about up-start architectural firms.  Architects often launch their own business so they can attain design freedom.  The leave the financials to their assistants and in so doing they do not understand the details needed to make sound decisions about their business.

Financial Statements

Across all business types, standard financial reporting is called Financial Statements.  Financial Statements generally include 2 parts:  first the income statement, which summarizes the business’s revenue, expenses and net/profit over a defined period of time.  These are prepared monthly, quarterly or annually depending upon the need of the business.  The second report is the balance sheet, which summarizes the company’s assets and liabilities on a given date.  From this report, one can determine the worth of the company.   Regular financial reporting through Financial Statements will give you a helpful view into the health of your business and whether the company is growing and on its way to meeting its targets.

Accountants & Bookkeepers

Accountants and bookkeepers are trained to prepare financial reports, which are standardized for reporting to tax department such as Revenue Canada or the IRS in the US.   Primarily, their reports consist of an Income Statement and a Balance sheet.

Additional reports may be created to facilitate the management of running of the company and determining the financial health of the company along with notes regarding the details of the Financial Statements.

Even though the business pays the accountant and bookkeeper to maintain the financial records of the company, they do the books in a format that best suits the tax calculations and reporting.  Most up-start businessmen, if launched without specific training, have difficulty understanding the Financial Statements and how to read them.

Setting up my business

When I set up my company, I had no experience with this type of financial reporting, so I hired a bookkeeper to ‘keep-my-books’ and report to me on the financial health of the company.  This report was prepared for me in the standard tax reporting system.  My bookkeeper interpreted the Financial Statements as they applied to my business.  So, in a sense, my bookkeeper was running the company from a financial point of view. It seemed the priority of the financial reporting was for the tax department calculations.

At this time, I made most of my company decisions based on intuition – which was all that I had to go on.  I did not realize how financial records could help me make decisions about the company

After many years in business and taking numerous courses on the topic, I finally began to understand Financial Statements.  However they did not provide the information in the format that I could easily use to make basic decisions in my company.  As an architect, I understand the value of money, however I think about finances in ways different than an accountant does.  Conversely, most accountants do not understand the workings of an architect’s business except when it comes to payment of taxes.

For the first 20 years, I ran my business without really understanding the financial reports and how I could use them to make informed decisions about my company.  Only due to hard work, long hours and taking a low income, I somehow managed to stay in business.

After 20 years, when I finally met a mentor who helped me understand how to harness the information contained in financial reports in order to make informed decisions.  Once I understood the Financial Statements, I sat down with my bookkeeper and accountant and together we designed a monthly report that was meaningful to me –not just the  tax department.  Since then my brand of Financial Statements have given me the  information that I needed to may sound decisions for my company.

These include:

-       when to buy new equipment

-       when to hire new team members

-       what aspects of my business were profitable & efficient

-       which of my staff contributed most to company success

-       which of my clients were most profitable

-       how quickly my company was growing

-       was I meeting my financial targets

-       staff to revenue ration & staff to profit ratio.

This changed everything, moving forward.  Suddenly, my decisions regarding the company were better.  I could take a longer view to the where the company was headed since I had historical records to compare.  If there was a business opportunity, I had the means to evaluate it using the records I had kept over the years. 

Once I came to understand the finances of my business, I was able to work less and earn more money.  But, most importantly, I worried less, as I knew precisely the financial health of my company and actions that I needed to take to ensure continued success. 

NORBERT LEMERMEYER Phone: 780 490 8831 Email: norbert@architectureplusbusiness.com Website: architectureplusbusiness.com Twitter: @archplusbis Blog: Architecture+Business Blog Author:  The E-Myth Architect   Why Most Small Architectural Firms Don't Work and What To Do About

NORBERT LEMERMEYER

Phone: 780 490 8831

Email: norbert@architectureplusbusiness.com

Website: architectureplusbusiness.com

Twitter: @archplusbis

Blog: Architecture+Business Blog

Author:  The E-Myth Architect   Why Most Small Architectural Firms Don't Work and What To Do About