How to improve your company’s financial reporting and record keeping

In a successful business, the right financial information gets to decision-makers, who in turn must understand what those financial reports truly mean for the business’s overall performance, as well as what information outside parties may look at.

“A lot of times people don’t realize that their financial reporting is a mess until a third party looks at it and starts asking questions,” says Kimberly Zagar, senior director of outsourced financial services/tax at BDO USA LLP.

Unclear financial information also can mean leadership is unable to make informed decisions.

In more extreme cases, companies without the right reporting processes can have cash flow problems as a result of invoices that don’t get paid, billing errors or things not being recorded properly.

And difficulties only intensify as the business grows.

“The larger an organization gets, the more complex things get because you’ve got more moving parts, higher dollars and more variables involved,” Zagar says.

Smart Business spoke with Zagar about challenges small and midsize businesses face, and best practices for financial reporting.

What are the biggest problems with financial reporting and record keeping?

It depends on the size of the company and the experience of management. For smaller companies, problems can range from not keeping good records or inaccurate accounting to keying in data and then not understanding what reports to look at and/or what those reports mean. With more established businesses, it is often a lack of timely access to information — an outsourced partner or financial department doesn’t produce statements timely enough, or decision-makers don’t fully understand the information they get.

Employers must know what the numbers mean in order to get an accurate picture of the business, whether that’s liabilities, cash flow, turnaround time for receivables, income and expenses, etc.

If this sounds like your organization, what can employers do?

The best and easiest thing is to get a professional adviser involved, even if it’s just having him or her look at what financial reporting you need, in order to give you an overview of the reports and ensure you’re on the right track. Ideally, you’ll work with someone and get advice upfront — before there’s a problem.

Only once you understand the requirements can you make an informed decision regarding how much you’re capable of, what you’re willing to do yourself and how much to outsource.

If the business owner is more focused on sales than finances, how much does he or she need to be involved?

Everybody has their preference for how much they want to be involved, but you want to have at least an understanding of what’s being done — reviewing these reports and understanding what they mean for the overall performance of the business. You may not be the person doing the work, but you need to be aware of where things stand because ultimately it’s your responsibility.

What do companies need to know about financial reporting for outside entities?

To run the business you need some type of financial reporting information, but third parties may impose additional requirements. Creditors, investors, owners, outside shareholders and/or government agencies could require special reports and may look at your financial picture from a different perspective.

This is why it’s also important to consider who might see your financial statements long term. Many employers have the intent, at some point, of growing the company through investors or requiring a bank loan.

It takes strategic planning to ensure the numbers give the correct picture, which is another way a professional adviser can help. For example, if expenses are high and revenue is low because you made a large investment in the company’s infrastructure or personnel, your organization may not have realized those benefits yet from a financial perspective. There’s information that the financial statements alone may not tell, unless you’re generating the right reports or giving that detail to relevant parties — in order to tell your complete financial story.

Insights Accounting & Consulting is brought to you by BDO USA LLP