No need for Annual Budgets !

What is the motherhood statement all about? How can I ever make this statement? Did I commit a crime? Well, let me dwell into this a bit to absolve

This is the “That Time” of the year organizations would have embarked the Annual Budget exercise.  Let us comprehend how all-encompassing is this practice, a judicious or significant one. If an iota of sensibility and rationality prevails, many in the organization would say no to this annual budget exercise. It was happening for the past many years…. We continue to do this, seems a compelling conclusion for this event.

Given the ever changing dynamics of the events around us, it’s only prudent and pragmatic to be aware of the fact that, change is the only constant. How far these changes can be envisaged and factored into the budget numbers? Will this ever be consequential? How to foresee and append all these into the budget? What events will happen 5 months or 7 months from now and how to factor those in the financial statements.

To quote an example, the change in the oil prices or a modification in the tax structure by the government will have a bearing in few line items in the income statement. These decisions may have an impact on the product pricing.  Given the above, an organization, which embarks on the Annual Budget ritual would have factored a standard rate and explain the variance month after month. Does this sound logical? Clearly no. Is there a solution? Yes. The answer to this is FORECAST

Now that we have an answer, my declaration here is to sidestep this annual budget exercise, and embrace Forecast. I advocate to have a quarterly forecast. This would give a tremendous clarity on the current situation and make modifications as the environment around is impacted by various decisions. All major events throughout the year, be it local or global, that’s impacting the business is known and necessary adjustments in forecast can be carried out. In this way, the business is well in the region of acceptable variances and more so, the cause for the variance is clearly drawn. This paves the way for the implementation of corrective actions.

As it ends, lets remember, Its not gonna be easy… but its gonna be worth it 

Financial Statements - Overview

Balance sheet  

This financial statement demonstrates the value of an organization’s Assets, Liabilities and share holder’s equity. It shows the net worth of a company at a certain time. It gives a complete picture of the ways in which the company’s assets are financed. It also predicts the future methods, a given company will use for financing to meet its financial demand.

The three main points a finance person will observe in a balance sheet are liquidity, leverage and net worth. Leverage is the ability of a company to meet its obligations in short term. Leverage and net worth show its ability to sustain for a longer period of time.

Income statement

The income statement or the profit and loss statement, reports the revenues, profits, losses and expenses of the company in a given time frame. There are many times during the period of growth, when companies have to show this statement in order to justify their profits claimed. This acts as a proof that the company has an ability to generate future profits in such times.

The statement of cash flows

The cash flow statement identifies the amount of cash that flows in and out of the business. The cash flows are estimated specifically for financing, operating and investing activities. This financial statement makes the business owner aware of the amount of capital needed for the running of the company, also showing whether the cash reserves are too high or too low. In case of high cash reserves, future investments are made otherwise they are declined. This statement also reflects the amount of cash utilized to meet the expenses

Financial Statements and its Analysis

Financial statements and its complete analysis cannot be neglected at any stage of the business. A business owner can never succeed without clearly formulating these reports and then comprehending them to meet the company needs. A person involved in any business can be compared to the captain of a ship. In order to know the right directions in a voyage, this captain seeks help from the given map. Financial statements are simply these maps guiding the business owners to attain success and avoid any future loss. 

Financial losses can act as a great set back to the company and lead to its ultimate downfall. These financial statements are essential for a company’s growth and their formulation should be by no means misunderstood as a waste of time. 

For medium and small sized enterprises, a thorough understanding of these financial statements is quite necessary. The precise explanation of the financial position leads to accurate assessment of your business performance, identifying all possible short comings and allowing yourself to make decisions that boost the company’s profitability. The critical importance of financial management is due to the higher risk of insolvency in SMEs as compared to large corporations. 

There are three most basic financial statements that describe the health of the SMEs and their performance over a certain time. These include the Balance sheet, Income statements and statement of Cash flows. 

Cashflow is the King

Financial reporting is very essential for running and analyzing its financial activities and every day operations. What do you look for when you need to see a person’s medical conditions? Obviously the medical reports and get them analyzed by a doctor. But when it comes to the health of your company, you need to look at the financial statements. 

Yes financial statements provide a precise overview of the firm’s health and performance. They help us scrutinize the current working and forecast the future earnings and performance through annual reports. Financial statements of any company are also important it’s mangers. Because the published financial statements help managers communicate with outside investors and other stakeholders. It provides a direct explanation of the firms operation based on financial grounds. 

There are multiple reports that fall under the financial reports of an organization. These different reports focus on different aspects of company’s performance. The most basic and important reports are balance sheet, income statement, statement of cash flows and stock holder’s equity statement. Each of these four statements and reports are very important. But you can never overlook, the implications of cash flow. It is because it comes down to cash in the end so you need to clearly understand how to manage it .This is the reason why cash is considered the king. 

Always remember these words by David Tangs, “The three most negative words in English are: negative cash flows.” He is absolutely right saying it.