🔒As businesses grow, so does the need for accurate financial reporting

As a small business grows, its need for accurate financial reporting increases.

In their early days, many businesses simply look at their checking account to see how they’re doing. But before long, that number paints an incomplete or inaccurate picture.

For effective goal-setting, to make strategic decisions, and to communicate the financial reality of the business to potential investors and partners, companies need to formalize financial reporting.

But it doesn’t have to be overly complex. Here are the basics.

Developing a monthly closing process

The first step is standardizing how information is gathered and how data is organized within the company.

You’ll need an accounting software system that supports your current reporting needs, but also has the ability to grow with you as you continue to mature as a company.

You will also need processes to enter transactions into that system. Once the system is in place, formalize your reporting and create templates and data sets in an organized fashion.

You want to be able to easily compare data on a month-over-month basis.

At that point, you will be able to implement a hard monthly close process. This process should include formal monthly reconciliations that are prepared by one person and then reviewed by another.

A formal monthly reporting checklist ensures that every month, you’re doing all the things necessary to organize and reconcile your data.

Assuring efficiency and continuity

The close process should be completed within the first week or so of the month following, not four or five weeks after each month ends. So, it’s important to ensure that your finance team has what they need to do the monthly close quickly.

Be sure to build into the process external reporting requirements that cover loans or investments. Businesses that don’t yet have this need should still keep it in mind as they formalize financial reporting so that they could easily enter into this type of relationship without reinventing the entire process.

Finally, you have to start restricting who has access to certain levels of data within your organization. Internal controls have to strike a balance between limiting potential security risks, and also including redundancy so that a single individual can’t bring things to a halt if they are out sick or leave their job.

Generating key statements

Having these processes in place should result in three key statements: a balance sheet, income statement and cash flow statement.

Any accounting software system should be capable of generating and customizing all three.

The key to making these statements useful is allocating accounts in a way that is properly reporting on a couple of key metrics.

As an example, a smaller middle market company usually has four major expense categories: cost of goods sold; research and development; sales and marketing; and general administrative expenses.

Having that basic four-line understanding of the macro costs creates visibility into the business that’s easy to understand. If you start getting into department-level expenses, you can assign subcategories to those four. But that can become cumbersome quickly, so there’s no need to rush into that level of complexity.

It takes some effort to get these processes into place, but when done well, accounts should automatically allocate within software and require minimal correction.

Achieving this fairly basic level of financial reporting is a major milestone for any growing business, and the positive effects of it will be felt immediately.

Matthew Soroka is a partner at accounting and advisory firm Fiondella, Milone & LaSaracina LLP (FML CPAs).