The top 5 things your financial statements show you
Savvy entrepreneurs can access all the data they need within their financial statements in order to make informed business decisions. After all, they know that knowledge is power and they know that the specific information they need to make effective decisions is within their reach at any time.
But what about those entrepreneurs who aren’t “savvy” – or – who aren’t as financially savvy as they should be? If you might be one of those, no worries. All you need is someone who can translate the numbers (i.e., data) into meaningful information that you can apply immediately.
Or, you can read this article to discover the top 5 (of many) financial statement “data translations” that guide smart business decisions, drive your growth and can greatly enhance your collaborative relationship with your bookkeeper and accountant.
Profit
Let’s just get this one out of the way first. Everyone always wants to know their profit. And they should!
Remember, revenue is all the money that you have coming in, but profit is how much you have left after paying all the costs of running your business. It’s important to realize that the dollar amount in your bank account at the end of the month does not necessarily equal your profit for the month.
There are a lot of factors that go into calculating your profit; the best way to verify your true profit (monthly, quarterly or annually) is by reviewing your financial statements, particularly the Income Statement.
Independently or with your bookkeeper, doing a “deep dive” into your revenue and expenses will show you how much profit you’re actually making and give you a much more incisive understanding of how to increase it.
Pricing
Once you have a solid grasp of your profit margin (the relationship between your revenue and your costs), you can determine whether your sell price (per product or service) is accurately set based upon your costs and circumstances. I see too many entrepreneurs who base their pricing solely on what their competitors charge or – even worse – a wild guess.
Your price needs to be an exact number that allows you to make the money you need to survive and thrive. While your competitors’ prices (what “the market will bear”) absolutely should be a factor, it should only be one of your considerations when determining prices.
Pricing is an incredibly individual business factor that can vary wildly based on your expenses, location, seasons, target market, materials, etc. The list goes on and on, but an accurate price evaluation is one that is based on true internal data that can be found in your financial statements.
Patterns
Knowing the patterns inherent in your business can make all the difference when making decisions. Depending on your industry, you may find that your sales vary each month, but they follow very distinct patterns year after year.
Your financial statements are an excellent source of information for future projections because they provide a clear overview of the past. Your current statements show you how your business is doing in the moment. By comparing the current period with previous periods, you will gain invaluable insight into how you can expect to do in the future.
Cash Flow
There are few things scarier to an entrepreneur than not knowing if they’re going to be able to pay the bills. You could have tens of thousands of dollars coming in each month in revenue, but still be sinking deeper and deeper into debt.
Understanding your cash flow means you know where your money comes from and where it goes.
A thorough understanding of your cash flow can relieve the stress that comes from not knowing if you’re going to go out of business in the coming weeks or months. (Believe it or not, many, many businesspeople operate under this kind of pressure.) It isn’t enough to simply have money in your checking accounts. You must also know the factors and equations that determine if you will still have money in your accounts six months from now
Expenses
Closely related to profit, price, and cash flow, expenses are a huge portion of your financial statements. You need a complete understanding of your necessary fixed and variable expenses in order to guarantee that you’ll be making money.
As I mentioned earlier, it makes no difference how much money you have coming in if it’s all immediately eaten by your costs.
Monitoring your expenses every month allows you to plug any holes in your financial ship before they sink the whole company.
Bottom Line:
Your business’ financial statements are critical to running your business; they are not to be used solely for tax preparation.
If you are only doing your books at the end of the year so you can hand them off to your CPA, you’re denying your business – and yourself – a wealth of information, insight, and guidance that can dramatically affect your success or failure and your overall quality of professional and personal life.
It’s not enough to simply keep track of your spending by just keying in your numbers and calculating your totals with an Excel spreadsheet (which is fine when you’re just starting out). But a spreadsheet lacks the capability to “interpret” your financials in each of the above categories as they relate to your business’ specific circumstances, challenges, and goals.
Let Still Waters Bookkeeping be your interpreter and show you what your numbers really mean and how they impact your weekly, monthly, and yearly growth and profit.