Congratulations on taking that crucial step of getting your books in order!
Most of you more than likely had this in order already, but ever so often I come across a client where that is not the case. On rare occasions, I actually see the cardboard box scenario filled with receipts and paid bills waiting to be sent off to the CPA.
More often than not I have seen, books that are less than stellar and less than accurate, hence the content of the previous article in this newsletter about the importance of securing that you have a bookkeeper that is savvy in the skills of bookkeeping.
Now, it’s time to fully unlock the power of your financial records. Understanding and regularly reviewing your Profit & Loss (P&L) statement and Balance Sheet can be transformative for your business. Here’s why:
1. Decoding the Profit & Loss Statement
Your P&L statement, often called the income statement, provides a clear snapshot of your revenues and expenses over a specific period. By regularly diving into this statement, you can:
- Identify Revenue Streams: Understand which products or services are generating the most revenue and which might need a revisit.
- Control Expenditures: Pinpoint areas where costs might be escalating and areas where spending can be optimized.
- Assess Profitability: Gauge how well your business is turning revenue into profit, allowing for more informed strategic decisions.
2. Demystifying the Balance Sheet
The Balance Sheet is a comprehensive view of your business’s financial health at a specific point in time, showcasing your assets, liabilities, and equity. Regularly scrutinizing this statement helps in:
- Liquidity Analysis: Determine how well your business can meet short-term financial obligations.
- Capital Structure Insight: Understand the mix of debt and equity financing, aiding in making informed borrowing decisions.
- Asset Efficiency: Evaluate how effectively assets are being used to generate revenue.
3. Forge a Habit
Consistency is key. Just as you wouldn’t exercise once and expect lasting results, it’s essential to make the review of these statements a regular habit. Set aside dedicated time each month or quarter to go through these reports. As you become familiar with the trends and patterns, you’ll be better equipped to make proactive decisions rather than reactive ones.
Conclusion
While it’s commendable to get your books in order, the true power lies in using them as the strategic tools they are. Your financial statements aren’t just pieces of paper; they’re roadmaps, illuminating the path toward business success. Embrace them, understand them, and let them guide you to greater heights.
I have met surprisingly many entrepreneurs and business owners who rarely if ever would frequent their financial statements. In fact, it would be pretty much only come tax season when they would have to confront their numbers, and by then they would often be surprised to find just how much money they were losing.
Already they would have felt the pain of the tight cash flow and have more than likely a growing list of payables that got older and older. But at tax season the amount of accumulated losses for the year would be staring in their faces when the CPA would reveal to them what their past year looked like.
The losses would often be a surprise to them, because their business now would be busier than ever with so many orders or so much work, so how could they possibly be losing money?
It used to be different. The business used to be smaller and they used to be making some decent money, that might even have made it possible for them to get some of their desired toys (boats, cars/trucks, cabins, travels, motorcycles or other).
I would venture to say that an estimate of some 70-80% of the clients I have seen, would rarely look at the financial statements.
I believe some of the reason behind this can be attributed to a lack of understanding of ‘how to read them’ and then what to do with the information that you see. I hope to help some of those who may resonate with this a bit through some of the next editions of this newsletter.
