How often should I review my financials?
For many businesses, especially those that have grown quickly, regular review of financials is not generally something that happens on a regular basis. This is not due to a lack of interest in how well the business is doing, but rather a lack of ongoing financial practices performed throughout the year.
It is more common than you’d think for a business to not compile revenues and expenses until tax time. In Canada, the Canada Revenue Agency (CRA) requires the filing of a corporation’s taxes within 6 months of the corporation’s fiscal year end. If your fiscal year end aligns with the calendar year end of December 31st, you must file your taxes by June 30th of the following year. Usually working with an external accountant, all the adjustments that need to be made for the prior year are done and taxes are calculated and filed. By June 30th, you have a good picture of how you did last year.
This works for the CRA – they get paid regardless. If this compilation of numbers tells you that you seriously overspent on a certain category or were not nearly as profitable as you had thought, you are up to 18 months behind on any remediating action needed to course correct. That is, of course if the issue is small enough that it isn’t catastrophic for your business.
In some businesses, profit margins are slim on a good day. Add in some unexpected or increased costs, and what once was a profitable business is now operating at a loss. If your business spends heavily on freight services for example, your profit margin is vulnerable to the price of oil. The more vulnerable your profits are on external pricing and commodity costs, the more important it is that you are regularly reviewing your financial performance.
Regular financial review is not as critical for those whose revenue is based on services they provide, such as electricians, plumbers, accountants, or lawyers. Their rate is their rate, and if they work a certain number of hours or complete a certain number of projects, they can predict their profitability accurately. In these cases, it is not as critical to watch your numbers so closely, you can save that effort for market research to ensure your revenue streams stay steady. This is not to say it isn’t important for everyone to be on top of their finances at all times, it is just more crucial in some instances.
Getting into a routine with your finances is important to make informed business decisions. Of course, you need to know the things to be looking for, and this is where an accountant (like me!) can help your business. Processes can be established to be completed every month, or even more frequently if necessary. This will ensure you have the information you need to be able to pivot your company as necessary when unforeseen events or circumstances arise.
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I LOVE banishing the “finance scaries” by teaching entrepreneurs in an easy-to-understand way. If you’re reading this, you might benefit from my FREE Financial Health Check, which will assess how you’re doing with the financial management of your business, and provide you with customized resources that will hopefully resonate with you.