mproved financial visibility is essential for the growth of your business. But business finances can be overwhelming, especially if your accounting system isn’t providing the in-depth insights into your profits and losses that you need to make informed decisions.
Regular financial statement analysis can improve your decision making considerably, but not if the numbers aren’t reflective of your business’s true financial standing. You also need a reliable system to review profit and loss, income statements, account reconciliations, and more.
Financial visibility is the goal, and with a solid strategy in place, you can get there.
What Is Financial Visibility?
For S corps and sole proprietorship in California, which have unique reporting and tax requirements, financial visibility is crucial. Financial visibility means having a clear view of where your business stands from a financial perspective. You understand your income sources, cash flow, expenses, and other details. In many cases, small businesses rely on unpredictable cash flow patterns and have low liquidity, meaning they’re always on the verge of running out of cash.
When you achieve financial visibility, you have a comprehensive view of your cash position to make fast, informed decisions as the market changes or new opportunities present themselves. This level of agility and security is vital in this unpredictable landscape.
How Much Financial Visibility Do You Have?
There are several important reports that you should always have at your disposal, including:
Your Balance Sheet
The assets and liabilities on your balance sheet inform your operational efficiency. If you’re presenting to investors, they’ll also look at shareholder equity. The balance sheet holds all this information for error-free reporting.
Your assets and liabilities are broken into current and non-current items. Current items are items that have an expected lifespan of less than a year, while current liabilities are financial obligations you have to handle within the next year. This may include your financial obligations with business taxes, employees, short-term lenders, or suppliers. You must be able to manage your operating cash flow to manage your liabilities.
Your non-current assets are assets that you own. This may include long-term investments, intellectual property, land, or other intangibles. Non-current liabilities are resources you have borrowed and must return, but not within the following year. Some of these include long-term property rentals, pension benefits, or deferred tax payments.
The Current Ratio
The current ratio informs your financial analysis considerably. You can calculate it by dividing your current assets by the total current liabilities. Once you have a clear idea of these numbers, you can compare them to benchmarks for your industry.
If you’re on the verge of insolvency or hoarding unnecessary amounts of cash, that can be a red flag for your business’s financial health and investors.
If you subtract your total liabilities from your total assets, you’ll get your book value of the shareholders’ stake in your business. This metric is used to determine how much shareholder capital was contributed over time and how much profit your business made and retained.
How to Achieve Financial Visibility in Your Business
Now that you have a clear understanding of your financial metrics, here are some ways you can achieve greater visibility:
Rely on Data
Data is the key to your financial visibility and strong business decisions. Make sure you have processes and systems in place to capture your expenses and monitor your cash flow in one central location, rather than on multiple spreadsheets or programs.
Data isn’t enough on its own, however. You have to have clean, high-quality data. Many accounting platforms don’t prioritize high-quality data and offer vague or irrelevant information, such as numerical codes for purchases on a bank or credit card statement. If you don’t have all the data you need, you can’t get a full picture of your financial health.
Don’t Wait on Analyses
If you’re not tracking your expenses carefully, you could end up with a lot of blind spots that won’t help your financial visibility. This often occurs when you enable employees to make business purchases and reimburse them for those expenses. Gaps can appear, and by the time you realize it, you’ll be overwhelmed with all the reimbursement receipts and the money you’ve spent.
Your analysis also relies on current, relevant data that provides the most up-to-the-minute information about your business’s financial standing right now. Once data ages, it becomes less useful and relevant. This is especially true in business finance. Always seek real-time data as much as you can and implement policies that help you see your spending as it occurs, not weeks or months later when you could end up overpaying on taxes.
Ditch Manual Processes and Embrace Automation
Manual processes, such as tracking information on a spreadsheet, is time consuming and leads to wasted resources. There’s a high risk of error as well, which won’t give you the most accurate information for your financial analysis.
For example, accounts payable often involves a long process of manual intake, processing invoices, approving them, initiating the payment process, and tracking your transactions. This is a big burden on your staff, not to mention that it can cost you hundreds or thousands of dollars in wasted spending.
Having long manual processes significantly increases the risk of errors or other issues that can hinder your financial visibility. As a result, you won’t have an accurate picture of your business now and you’ll have to fix these details later.
With automation, you can eliminate these manual tasks to reduce your costs, limit errors, and streamline these processes. Automation offers incredible advantages for financial visibility. You can save time and money, eliminate blind spots, and knock down information silos that impact your visibility.
Eliminate Information Silos
If you only have some of the data for your financial health, you could miss the whole picture and important details that make a difference in your strategy. You – and the other members of your team – need full access to data to make the most informed decisions.
There are several possible barriers to data access that can cause this. Your data should also be portable, which can be challenging with some solutions that don’t have this functionality. Your data should be as flexible as you are, so if your solution isn’t cutting it, it may be time to look elsewhere.
Establish a Comprehensive View
Key performance indicators (KPIs), such as your debt-to-income ratio, are important for your financial status, but the whole picture is more than just this one number in a vacuum. And with financials, your status can change in a split second, so you need the full context.
Data management with features that suit different departments, channels, products, and customer segmentations offer comprehensive views of your data and the appropriate context to interpret it for actionable insights.
When you have all the information in front of you, it’s easier to identify the factors and influences that contribute to your costs and profits – both directly and indirectly. You can then pinpoint the most important data and insights to inform your decision-making process.
Achieve Financial Visibility to Support Your Long-Term Business Health
Financial visibility is a key component of business success, but too many business owners have blind spots and gaps that keep them from understanding where their business stands currently, let alone to make decisions for the future. Building a solid foundation of financial visibility with high-quality data, accurate reporting, and better communication can give you the insights your need to monitor your financial health.
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.