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Salt Lake City Bookkeeping Blog

[Infographic] Using the Books to Stop Making Bad Financial Decisions

Posted by Austin Walker on May 25, 2016 8:30:00 AM

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Poor decisions are easy to make. They can certainly be the final stone that sinks the ship in a small business. One or two can be great learning experiences, but several poor decisions in a row can mean the end to a great company.

Entrepreneurs are pretty confident in the ideas behind their businesses. Otherwise, they wouldn't continue to be there. So why wouldn't they want to make sure that they're making the best decisions?

Organizing Finances

One of the first steps to making better decisions is for the company to put their finances in order. That makes sense, right? If a business is used to gather and build wealth, the most important thing to keep organized is cash.

Bookkeeping for a small business is a task that we can easily fall behind on and often put on the back burner. If the books are neglected, then the information that QuickBooks or other accounting software produces becomes unusuable.

Updating once a month can be a good start, once weekly is great, but once a day can really make the difference in keeping small businesses organized. Owners have a better chance of making better, more informed decisions and can certainly improve the chances that they will succeed.

Confirming Gut Feelings With Data

Have you ever purchased something only to experience follow-up feelings of severe buyer's remorse? Chances are, the product you purchased did not meet your expectations or the perceived value of the product was above the purchase price. After having the product for a while, you realized that the actual value of the product was well below the price you paid, and now you regret wasting that money.

A lot of buyer's remorse can be avoided if you research a product more thoroughly and review the data showing you whether it is capable of fulfilling your needs.

The same happens when the books are updated and the information being produced is accurate. When making a decision, having the data to back up the decision, rather than just pointing your business in a direction and going on instinct, can help an owner reduce the stress of the decision. The data can help you determine whether your decision is a good one and reduce the amount of risk you're taking. Over time, it can help relieve your worst stress symptoms (you know, the kind you get when making gut decisions without data to back up the choice?).

Forecasting Into the Future

When do youcreate your budget? How often do you go back and compare your actual performance versus the budget?

A budget should be made prior to the fiscal year. The projection made in the budget should remain unchanged throughout the year and be compared to the actual performance.

A forecast is created at the end of every month and takes into account the company's actual performance to create a glimpse into the future.  Forecasting 3-6 months out is beneficial; any further than that and the information at hand makes it too difficult to predict an accurate forecast. There are too many variables that could change after 3-4 months. 

The most important part of the forecast is that, going back to gut feelings, it can confirm or refute the decision made. Forecasting can even be used to determine whether a new hire is affordable, whether your company is ready to take on a larger marketing budget, or if there are expenses that can be cut now, that don't have an effect on the future.

With forecasting, when done with up-to-date information and based on actual data, increasing the bottom line should be your goal.

Use your bookkeeping to make better decisions

Collaborate with Key Employees and Advisors

Why wouldn't you continue asking friends, family, and co-workers for their opinions for key decisions? I'm sure it's a habit you've had throughout the years, and it's always great to get a second, third, or even fourth opinion on your plans. Not only will you hear why they think it's a good idea, more importantly, they may bring up things that could go wrong or poke holes in the plan that you hadn't forseen. Adding a little more weight to the scale with regard to the advantages versus the disadvantages of the decision can help as well.

Outside advisors work really well too, if the decisions is really big. If you're deciding on which color to use for the furniture in the office, probably not. With a decision that will clearly change the way your company operates, or a pivot that creates dramatic internal change, an small business mentor should be brought in.

Poor or stupid financial decisions can be easy to make, but here are at least a few steps you can take to prevent another slip-up. 

What was your worst financial decision? What did you learn from it and how did you implement that knowledge into your current day-to-day?

Need an outside advisor? Click here. We can help.

Topics: Small Business