Do you ever get the feeling you're only preparing financial statements because you're forced to? That you're preparing financials because the bank requires them, or your CPA said it's the right thing to do, or because you have to have them to file your tax returns?
If so, I have an interesting perspective to share with you. I want to show you the real reason for creating financial statements. And it has nothing to do with the bank or the IRS. It has everything to do with YOU.
Here is the word that I believe best describes the purpose of financial statements — accountability. Your financial statements help you hold yourself and the people who work for you accountable for results.
They help you get what you want from your business.
And in its simplest form accountability is about what did you say you were going to do -- and how did you actually do against that goal or commitment.
The Formula for Success
Success in business (or life for that matter) is about following this formula.
- Set a clear goal.
- Create a specific plan to achieve the goal.
- Implement the plan.
- Measure your progress against the plan
- Change as necessary to achieve the goal
If you're not following this formula, you are not managing your business. More likely, the business is managing you. And that's a recipe for disaster.
Your financial statements play a huge role in measuring your progress against your plan. And that's where accountability comes in.
Here's an analogy to illustrate the point.
Let's say your son or daughter comes home at 11:30 at night. Is that good or bad?
The answer is it all depends on when they said they would be home. If you agreed they would be home at 10:30, that's bad. If you agreed they would be home at 12:00, they're scoring some major points, right?
What did you say you were going to do and what did you do?
The same thing applies to managing your financial results. If making money is one of your objectives, then you have to hold yourself accountable by becoming maniacal about evaluating your performance every single month.
You have to see exactly what results you produced compared to what you wanted to produce. That's what your financial statements reveal for you. Then you can decide if you need to do anything different in the future to ensure you get the financial results you want.
With the financial side of your business, you set a budget, create a plan to achieve that budget, and then measure your progress every month against the budget or plan. Once you have compared what happened vs. what you wanted to have happen, you determine what you need to do more of and what you need to do less of in order to achieve your goal.
That's what you have to do in order to grow your business and make the money you want and deserve to make.
The same thing applies to the people who work for you. If a person has responsibility for achieving financial results in your company, then you have to follow the same formula. Set a goal (with his or her input preferably), monitor actual results each month, and then provide any coaching or motivation to hold them accountable for results.
You will be amazed how much more effective you become when you begin looking at your financial statements as your primary means of getting what you want and deserve from your business.
Not having financial statements is like buying a lottery ticket then saying "I don't need to know what the winning numbers were." You would have wasted your time and your money by buying the ticket then, in effect, making it worthless by not finding out if you got what you wanted.
That would be the definition of insanity.
So make a commitment to yourself to use your financial statements to get what you want from your business. Use a budget to set specific financial goals then measure everyone in your organization against those goals every single month.
You'll be amazed how accountability will accelerate the achievement of your goals.