Let me get this off my chest right away….most business owners stink at reviewing their financial statements. It’s not an intelligence thing or even a lack of effort. The cause boils down to three reasons:
- Whoever prepared the financial statement for the owner (i.e. bookkeeper) is so consumed with the process of getting the statements done they haven’t worked with the owner to properly review them.
- A lot of business owners manage their business by their bank account…They don’t need to see their financial statements, they know exactly how much is in the bank.
- Business owners don’t have time. When you have a bookkeeper fumbling to tell you what the financial statements mean, who has time when you have other urgent things to do.
I get all of these. I even partially agree with them. However, just because that’s the way it is doesn’t mean that is the way it should be. I am not going to talk about how a business owner should be reviewing their financials. What I am going to do is give you three advantages you could be getting from a better review of them.
1. Find out where your cash is going. Cash is king to business owners. I know this because I am one as well. However, business owners often struggle to figure out why they don’t have cash at times and why they are flush with cast at other times. A few simple calculations and you’ll have a lot of your answers. Are you carrying too much inventory? Are you paying your vendors too fast? Do you have a collection problem?
Answers to those questions and more are simple to figure out. And really, to run your business well you should know those answers. The best thing is, now we are starting to talk business strategies…strategies that will put more cash in the owners pocket.
2. Am I wasting money on expenses? Odds are, if you haven’t reviewed your financial statements in a while, then yes, you are wasting money somewhere. One problem I see is bookkeepers often give the business owner their completed balance sheet and income statement and it might even show the month compared to the same month in the prior year. However, how is an owner supposed to review their expenses with any context? Doing a trend analysis on your income statement will quickly tell an owner exactly which items to key in on.
3. How efficient is your business? For every sale, how much are you taking home in cash? What is your payback on your sales team? Are your prices too low? How many of those questions as a business owner do you truly know? Most can answer what they think, but few really know the answers to any of these questions.
What I have detailed above is just scratching the surface. For starters, it isn’t industry-specific. Odds are, you’re going to have a few key statistics related to your industry that will help your business. Second, we’re just talking about the basic financial statements. Most businesses start to get to the next level when their accounting takes the next step and generates them reports that tell them more information specific to their needs.
Don’t skip this process for any of the reasons I listed above. You’re the owner…demand more from your accounting team. Get the information you need to accomplish your goals.