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As a business owner, your day is primarily focused on fulfilling your overall mission, meeting customer needs and keeping up with day-to-day obligations. While less of your time is likely to be focused on the accounting policies that your company is using, we’re here to remind you just how important those policies are.
The accounting policies you adopt create the internal reporting standard that’s reflected in the financial statements of your business – all of which impact how you benchmark and communicate success. What story are you communicating to the outside world? How can you report the story in a way that is easy to understand but still communicates who you are, what you do and how you are achieving success?
First, when selecting accounting policies to use, your first goal should be reporting operational activity and not necessarily based upon ease of recordkeeping. For example, cash basis reporting is easy as we record transactions on the flow of cash in and out of the organization. But it doesn’t account for the significant operational activity that takes place between the use of cash funds and the collection of such funds. Operational activities, such as the conversion of raw materials to finished goods, are central to our operations but are omitted in this process. In this case, using an accrual basis reporting, which tends to be more complex, would tell your story with more clarity.
Another missed opportunity is not prioritizing book reporting objectives over tax objectives. Your operational story becomes diluted when you select accounting policies based solely upon your tax strategies. While minimizing tax obligations is important, reduced profitability is not a story you want the outside world to know. You want your story to be one of steady growth and investment. This occurs when you choose accounting policies based upon operational objectives rather than tax objectives.
As you review your internal financial statements, take a moment to reflect on the story they are telling the outside world about your business. Is it a story of steady growth and investment? Or is it sending a mixed message? We recommend revisiting your accounting policies to ensure that they convey your operational story in a positive, more accurate light. Should you need any assistance, please don’t hesitate to contact Cray Kaiser. You can also click here to learn about our Accounting Services.