It’s all in the details. Well, sometimes.
When you’re running a business, you need to get pretty familiar with your financial statements. The information contained in those documents is crucial to understanding how your business is doing, and what you can do to improve.
But there’s a lot of wiggle room when it comes to the information included in those financials. What level of detail is necessary, and how much is too much?
|What financials are we talking about here?
|What do we mean by detailed?
|How much detail do I need?
|More is not always better
- Your financial statements, such as your income statement, balance sheet, or cash flow statement, can be used to gain insight into the performance of your business
- Those statements can be customized to contain more or less information, depending on your needs
- More detail can help when analyzing things that are important for your business
- More detail might be a distraction if the information isn't relevant to your decision making
What financials are we talking about here?
When we say “financials,” we mean the documents containing records of a business’s activity. A good bookkeeper or accountant can take the general ledger, which contains details of all the individual transactions, and use that to generate a series of other documents that explore that information.
- The income statement measures a company’s performance during a certain period of time in terms of income (obviously) and expenditure. How much money comes in, and how does it compare to the amount of money going out?
- The balance sheet is a snapshot of a company’s financial health at a specific moment in time. What did you own, and what did you owe, on a specific date? A balance sheet generated for that date will tell you.
- The cash flow statement measures liquidity. It can be generated from the income statement and the balance sheet, so it’s third on this list, but it’s still very useful. Other financial statements can incorporate accounts receivable and accounts payable, meaning the total numbers include money that will move in the near future, even if it hasn’t gone in or out yet. That makes the cash flow statement a good way to assess a company’s ability to keep enough cash around to cover its bills.
What do we mean by detailed?
Most accounting software (you’re using accounting software, right?) comes with a standard chart of accounts that you can use. From there, you can add more or less specific information, usually in broad groups called classes (in QuickBooks) or tracking categories (in Xero).
Detail here basically means splitting up larger numbers into smaller numbers. You can split up salary costs by department, break down utilities into gas or electric or water, or have separate entries for each franchised location. Your needs will inform the unique way that your financial statements are put together.
How much detail do I need?
The more detail your financial statements contain, the greater the level of analysis you’re able to perform with them. But how much detail are you really looking for?
A good rule of thumb is: if you’re asking the same question every time you’re looking at these documents, that information should probably just be included by default. For instance, if you’re the owner of a car wash, you might look at your utilities expenditure and wonder, how much of this is my water bill? At that point, it’s a good idea to simply include a category for the water bill going forward.
However, this should only be done to answer questions that are relevant to your industry, not out of simple curiosity. If you’re not a car wash owner, but instead own a furniture store, you probably don’t need to know the specifics of your water use. A simple utilities expense will probably suffice.
Beyond presenting information most directly relevant to your industry, it may also be a good idea to add more detail if your company has multiple locations, or multiple departments if they’re at a large enough scale. If you have multiple locations, maybe you want to know if one of them costs more to operate or has higher sales numbers than the others.
More is not necessarily better
It may be tempting to gather all the detail you possibly can. More information is better, especially when it comes to the health of your business, right?
Well, sometimes too much detail can be a distraction. If your financial reports contain piles of information that’s not actually relevant to your decision making, it can be easy to lose focus. We want to see the forest, not a series of individual trees.
It’s also important to consider how often you use that information. Only details that help you run your business on a regular basis need to be included in your usual financials. Otherwise, it’s just clutter.
After all, you can always generate additional financial reports that include more detail. If there’s a specific problem that you need more information to solve, just add it to your financials temporarily. And then, once that problem has been solved, go back to your usual level of detail for day-to-day operations.
Ultimately, we want to understand the difference between needing detail and wanting detail. Every column you add to your financials is another opportunity to make a mistake, so you want to keep it simple wherever you can.
The bottom line
More detail means more analysis, but more isn’t always better. Everything you add to your financial reports is just one more thing you’re making yourself think about, and one more place for something to go wrong. You want more detail on questions that are consistently relevant to your business.
If that sounds complicated, why not schedule a call with DiMercurio Advisors? We spend a lot of time handling financials for all kinds of businesses, and we can help you identify what you need to get ahead. And for the stuff you don’t want to think about, let us handle it!