As a typical small business owner, you are used to doing it all. But, because there are only so many hours in a day, most business owners simply settle for running a few standard accounting reports at the end of each month, because – well – that’s what you are “supposed to do”. So you run an Income Statement report to see if your business made (or lost) money in the last 30 days, as well as a Balance Sheet report to make sure there are funds still left in the bank account. And then with a quick glance at the top and bottom lines on the reports, it’s back into the saddle and time to gallop off to the next important task.
If this sounds familiar, you may be missing a big opportunity to understand and improve your business. Do your Financial Statements tell the story of your company…..or are they just keeping score?
The KIS rule – Keep It Simple!
First, keep it simple and easy to digest, so start with the design and layout of your financial presentation. It should be clean and easy to understand – never more than a one-page summary. I’ll never forget one of my first meetings with a new client. He owned a truck repair shop, but he wanted to run his company just like the Andy Garcia’s casino owner from the 2001 movie Ocean’s Eleven. Every morning, Garcia’s character was handed a single, one-page summary of the previous day’s financial activities, which he quickly reviewed, analyzed and approved or acted on. Now my client didn’t want to run a casino, but his point was on target – he wanted his financial reports to show his key metrics in a quick and concise manner.
- Breakout your Income Section by product or service line. That way you can quickly assess, on a monthly and annual basis, which streams of revenue are excelling, and highlight which lines of business are lagging.
- Define a Cost of Goods section. These could be materials, labor, or other costs that are directly associated with producing income.
- Finally, group all other expenses by operational functionality. What types of expenses are a major part of the fixed costs that you need to pay every month, regardless of whether money is coming in or not? For example – rent, utilities, office cleaning, computer supplies, and maintenance expenses (to name a few) should all be rolled up into Operating Expenses. You have to know how much it costs just to keep the lights on every month along with how much you are spending on sales and all of your marketing ideas.
Compare this year versus last year.
Sure, you think you are having a record year, but how would you know if you don’t have a monthly and year-to-date comparison to last year’s numbers? Perhaps the numbers were overinflated one month by an unusual market condition. Plus, year over year, as well as month to month comparisons, can help you spot trends as they develop, alerting you to a potential on-going problem that has been slowly, but steadily, getting worse.
Lastly, consider who else may see your numbers.
When it comes time to talk to your bank about expansion or obtaining that line of credit, clean and clear financials will be required. The same for when it’s time to think about bringing on a new partner. Good financials and the story they tell can often be the difference between making and breaking the deal. Remember to separate out any owner fringe benefits (like car payments or gym memberships) from ordinary and necessary business expenses so the true value of the company can easily be recognized.
In summary, don’t think of Financials Statements as a necessary, but tiresome, ritual repeated every thirty days, but rather as chance to review your company’s evolving story on a monthly basis. Structured properly, they will be a valuable tool that helps you make informed business decisions, understand problems early, monitor progress, and open the door to future growth and expansion.
Scott Brinser, owner of Brinser Consulting, an accounting professional with over 20-plus years of experience is your outsourced accounting solution. From bookkeeping duties to part-time CFO services, Scott provides relief to small and mid-sized companies that do not have the need for a full-time accountant. He works with your CPA accountant to keep the books clean all year long, while providing top level analysis that will help you fully understand the numbers, and allow you to concentrate on growing your business!