Ask your accountant "How's my business doing?" and a smart one will answer "it depends".  There is no simple answer.  Different stakeholders have different goals and objectives when asking about your company's financial status.

The Tax Man
When the IRS asks the question, you want to answer "not very well - I didn't make much money so I owe you very little".  For the tax man, we want to minimize our income and maximize our expenses.  To do this, many of us keep our books on a "cash" basis (versus "accrual" basis) for taxes.  That means if we spend it, we deduct it.  We make sure we've paid all the bills by the end of the year.

We also want to take advantage of accelerated depreciation to minimize our taxable income.  If we buy a capital asset (something over our capitalization policy - for example, $1,000) that has a useful life longer than one year, then we should spread the cost over its useful life.  Generally, we have to pay for the asset when we buy it (or we finance it through bank borrowing) but we record depreciation each year to show the economic reduction in value over time.

The Banker
When the Banker asks how you are doing, you want to tell them, "Great!  Everything is going well, the business is growing, we need money to grow, and we have the ability to pay you back."

For the banker, we might not want to accelerate that depreciation, but record it more slowly over the asset's life.  This is the difference between "book" and "tax" depreciation and is both consistent with tax laws and accepted accounting practice.

We might also prefer to use the "accrual" method to keep our books.  In this case, when we make a sale and have earned the sale, we record the sale, even if the customer owes us the money. 

The CPA
If your banker or investors require an audit or a review, the CPA will want to ensure the financials are fairly presented according to generally accepted accounting principles (GAAP).  For example, they might have you record start-up and organizational costs on the balance sheet and amortize them over a number of years.

The Owner
You want to know the money you have in the bank is yours to keep.  Cash basis statements don't really tell you this.  The accrual basis statements don't tell the whole picture.  The GAAP statements may be accurate, but they aren't much of a management tool. 

You will want to see a combination of all the information used by the other stakeholders.  You'll also want to separate the recurring costs from the non-recurring costs.  For example, the organization costs that the CPA put on the balance sheet reflect cash money out the door.  However, they are non-recurring.  You'll want to manage these costs differently than your recurring costs like cost of goods sold or supplies.

Fortunately, you are not alone in this dilemma and we can help you identify the Key Performance Indicators (KPIs) that best meet your business.  We can help you focus on the metrics that will help you improve the performance of your business, not just report on what has already transpired.  We understand what YOU need to know about your business.