At the beginning of every year, I get an influx of calls and emails from founders and small business owners looking for help preparing their financial statements so that they can file their tax return. In many cases, their bookkeeping has fallen behind, and they need to get everything caught up before their tax filing deadline. Once the financial statements are finalized and the tax return is filed, many feel like they’ve checked the finance box for another year.
While preparing financial statements for tax compliance is important, it is the bare minimum. A company’s financial information should be helping management make better business decisions throughout the year. Whether management is evaluating a new hire, assessing cash flow, preparing for a financing round, or deciding where to invest its resources, having reliable financial information provides the foundation for those decisions.
When that information is inaccurate, incomplete, or unavailable when it is needed, it affects the quality of decisions being made throughout the business and, ultimately, how the company grows, manages risk, and responds to new opportunities.
Using Financial Information to Drive Better Decisions
Good financial information is about giving management the information it needs to make better business decisions. That starts with a disciplined month-end close process, regularly reconciled accounts, and reporting that goes beyond the financial statements.
Recently, I spoke with a founder who was only receiving financial statements every three to six months. Based on the last set of financials he had received, he believed the business was profitable and hired two additional salespeople to accelerate growth. By the time the next set of financials was completed, he discovered the company had actually been operating at a loss due to higher costs and softer revenue. Had he received timely financial information, he told me he would have delayed those hires until the business was back on track.
This example highlights the value of timely financial information. It allows management to make informed decisions based on the current state of the business, not where the business was several months ago.
Why it Matters
The cost of poor financial information is rarely one significant event. More often, it is the accumulation of small delays, missed opportunities, and decisions made without reliable information. Individually they may seem insignificant, but together they can have a meaningful impact on a company’s growth.
- Management Spends Time Looking Back Instead of Looking Ahead
When the underlying financial information isn’t reliable, management spends valuable time trying to understand what happened instead of deciding what to do next. Rather than analyzing trends, time is spent fixing historical information or trying to fill gaps. This creates delays throughout the organization and limits the value that the financials can provide in driving decision making.
- Decisions Are Made Without Reliable Information
Every significant business decision has a financial component. Hiring employees, increasing marketing spend, investing in new products, expanding into new markets, or raising prices all rely on an understanding of the company’s financial position.
When financial information is inaccurate, incomplete, or outdated, management is forced to make decisions without the facts. While experience and instinct certainly play an important role, they should complement reliable financial information, not replace it.
- The Business Can’t Respond Quickly
Business opportunities rarely arrive on your schedule. A lender may request financial information as part of a financing application. An investor may ask for historical financial statements during a fundraising process. A potential acquirer may begin due diligence with very little notice.
I’ve spoken to many lenders who have passed on otherwise promising companies because management couldn’t provide reliable financial information to demonstrate the company’s ability to repay a loan. In many cases, the business itself wasn’t the problem, but the lender simply wasn’t comfortable making a lending decision based on the information that was available.
Companies with reliable financial information can respond quickly and confidently when opportunities arise. Those that can’t often spend weeks catching up and by the time they’re ready, the opportunity may already be gone.
- Confidence in the Numbers Is Lost
Reliable financial information builds confidence. When leaders begin questioning the numbers, decision making slows, discussions shift toward validating the financials rather than interpreting them, and the business becomes more reactive. Restoring confidence in the financial information often becomes the first step before management can confidently move the business forward.
How Companies Get Here
In most cases, poor financial information isn’t the result of poor management. It’s simply a byproduct of growth. Founders are focused on building the business, serving customers, hiring employees, and generating revenue. As a result, the finance function often doesn’t evolve at the same pace as the business until the existing processes can no longer keep up.
This is a common challenge. As a business evolves, so should its finance function. The goal is to ensure management continues to receive the timely, accurate, and meaningful financial information needed to make informed decisions.
Building a Finance Function That Grows With Your Business
There is no one-size-fits-all approach to building a finance function. The right solution depends on the stage of the business, the complexity of its operations, and the strengths of the founder and leadership team.
The objective is to build a finance function that provides leadership with the timely, accurate, and meaningful financial information needed to make informed decisions. As the business grows, that finance function should continue to evolve alongside it.
Ultimately, the true value of a finance function isn’t measured by the financial statements it produces. It’s measured by the quality of the decisions it helps management make.
If your financial reporting isn’t giving you that level of visibility, BrightIron can help. We work with growing businesses to build finance and accounting functions that provide the insights management needs to make informed decisions and support long-term growth.
