I hate keeping records. I once married a gal because she didn’t mind filling out forms and doing paperwork. She had a few other things going for her, too, but her willingness to track and crunch numbers sealed the deal.

Now, that having been said, remember two things:

It’s November. That means it’s time to begin diving into that junk drawer in your filing cabinet where you stuff your receipts and invoices, and create an orderly financial system for 2010.

That’s because good financial records are crucial. They are the tools that help you track your company’s past performance and present financial health, plus set realistic goals for the future. Without them, you are flying blind, without a clue about your business’s financial condition.

You don’t have to become a Harvard MBA. However, to truly maintain control of where your business is and where it is going, you do need to learn the basics. And trust me, there are more than a few SBOs out there who don’t have a clue.

Financial statements 101

The two primary financial statements are income statement and balance sheet. Go online to the Small Business Administration website (www.sba.gov) for free samples.

• The Income Statement: Also known as a Profit and Loss Statement, the income statement tracks your company’s income minus expenses. It shows whether the business made a profit or loss for a specific accounting period. Some business owners record and study the numbers daily.

The income statement helps business owners understand sales patterns — which products are selling, what days or seasons produce the most business, etc. It also reveals expense patterns and can help identify cost-cutting areas. Most of all, income statements clearly show the business’s bottom line — the exact amount of profit or loss based on sales and the cost of bringing in those sales.

• The Balance Sheet: (Now, here’s where it gets really boring, but read on anyway. It’s important.) The balance sheet factors in the big-picture elements of assets and liabilities that show the business’s net worth and overall financial health. It provides a picture of your company’s true financial condition and direction. There are two elements:

• Assets, which include cash on hand, accounts receivable, the purchase price value of inventory, prepaid expenses and fixed assets (real estate, equipment, machinery, furniture and company vehicles).

• Liabilities, debts owed by the business. These include accounts payable and outstanding debts, such as lines of credit, mortgages and installment loans.

The balance sheet shows whether your business is profitable or slipping into debt.  It lets you plan for the future. (And that’s not boring at all, but downright exciting.) Can you make the decision to borrow money for a new sales campaign, expansion or product line? Or should you postpone the project and concentrate on reducing present debt load? Can you bring on a new employee or should you cut back on staff?

The bottom line
• Keep good records. They are the raw data that reveals your business’s true condition.

• Record and review sales and expenses every day, never less than once a week.

• Prepare an income statement and balance sheet report at least once a month.

• Compare reports with those from previous periods, looking for patterns of activity, as well as discrepancies in certain areas.

Yes, record keeping may be a drag. But the information that good records provide is both priceless and, yes, I have to admit, awfully exciting. Don’t like keeping records? Then find someone who does. And, no, don’t contact me for the phone number of my ex-wife.

By John Ingrisano

John Ingrisano is a small business owner and the author of The Back to Basics Book of Selling: A Guide to A Successful Sales Career. Contact John at john@ TheFreestyleEntrepreneur.com.

Please login to post your comments.