Turning your monthly financial statements from a requirement into a tool for your business
When I meet with prospective small business clients that currently receive financial statements from their accountant or generate monthly financial statements on their own, the obvious question I ask is, “how do you analyze your financial statements?” I receive one of two responses 90% of the time:
- I file my financial statements in the drawer. Look here they all are!
- I don’t really look at the financial statements. I go by how much cash flow we have and I’ve been in business for 20 plus years doing it this way.
These businesses are paying for the service of creating the financial statements but missing out on the value they provide. Creating monthly financial statements is not just a process needed on the way to creating annual financial statements and a tax return. They are a tool that can be used to figure out what happened during the month…sort of like a reality check.
I can use a strange but accurate analogy of comparing financial statements to a scale when you are attempting to lose weight. If I go to Pizza Hut and gorge myself on one of their large stuffed crust pizzas, I won’t want to get on the scale the next morning and face the reality that what I ate the night before is really going to have an effect on the scale numbers. The numbers may be frightening if I choose to get on the scale. Most of us (I have done this as well) choose to ignore the scale the next morning because I don’t want to face the bad news.
However, some of us will step on that scale anyway the next morning and face up to the fact that no matter how delicious that stuffed crust pizza was the night before, it isn’t helping us to our goal of being more fit and healthy. So after you see the numbers on the scale, you contemplate what went wrong, figure how you can avoid the same situation next time, and set goals for doing better.
Financial statements are the “scale” of your company. There will be months where sales are down, income is down and we don’t want to look at the financial statements because we don’t like what we see. They make us feel accountable, especially if we know that our actions led to a bad month. Maybe we didn’t meet with our referral sources like we should have. Maybe we decided to take a long vacation instead of working through the summer. Either way, by reviewing the statements, it lets us take time to ponder about the month’s activities and our long-term goals for the company. Setting aside time to review monthly financial statements gives you time to reflect and plan.
It all doesn’t have to be bad either. You might have worked very hard last month to build your sales and the financial statements reflect a great bottom line. Your time spent reviewing your financial statements can also be a time of celebrating how hard you worked and you can see the results of your efforts on paper.
There are so many ways to analyze your monthly financial statements. You can compare them to an annual budget. You can compare them to the previous year. You can even pull out certain key performance metrics that you have determined really drive your profitability such as labor as a % of sales. It all starts with a mentality of pulling your head out of the sand and reviewing your monthly financial statements whether you have a good month or a bad month. By stepping on that “scale” every month, you will be more accountable and your business will be better for it.