When I say “I love numbers” it’s because I love the understanding that they bring to me.  I don’t like the processing or the recording.  But, I do love understanding the results and planning for the future.  Without the actual recording of the numbers, you can’t understand what your business is doing.

Over the last couple weeks, we have been learning the basics of accounting – we’ve been learning how to record your transactions.  I highly recommend reviewing the past posts to catch up.  In a nutshell, I’ve gotten you organized, helped you with basic accounting terminology, avoided the myths of debits & credits by tell you to buy and use accounting software for your business.

Today, we are going to learn what sort of financial reports (AKA “financial statements”) you need to become familiar with.  These reports are easily generated with the use of accounting software, such as Quickbooks.

Knowing your Numbers Step #6: Generate Financial Reports

One of the reasons that I think it’s REALLY important that you invest in financial software is because of how easy it is to generate financial reports, or financial statements.  It is nearly impossible unless you have taken a course in accounting.  If you were a first grader, would you attempt to read a fifth grade book?  PROBABLY NOT.  So, without having education in accounting, why (and HOW) would you try to assemble financial statements? Even I, who have studied accounting and worked in the field, would not attempt to assemble financial reports from scratch.  Oh – I can.  But, seriously… why would I want to?  Technology is an incredible thing.

OK, OK, OK… you get the point…

Yesterday, we learned how to record transactions in Quickbooks.  And, I’m not lying when I say that the recording of transactions is all you will have to input monthly.  You will not have to “MAKE” reports.  Quickbooks does it.  At the menu bar, there is a option called “Reports”:

These are the following reports you will need to analyze monthly in order to understand your business:

  • Balance Sheet
  • Profit & Loss

There are other reports I love to tinker with to understand what my business is doing.  But, if you’re just starting out, this is a good place to begin.  Download these each month on your “Accounting Day”.

Knowing your Numbers Step #7: Analyze Financial Reports

Now that you know HOW to generate financial reports, you have to know how to read them.  HAHA!  This is the fun part.  This is where you get to be the problem solver.  As a business owner, you should always strive for betterment (not perfection).  How can I better my business?  This is the question I constantly ask myself when review these reports.  Let’s begin with…

The Balance Sheet

The balance sheet shows a snapshot your company’s worth.  It shows how much you own (your assets) and how much you owe (your liabilities or debts).  It also show’s how much you, as the owner, have personally invested in your company (how much you own.)  Let’s take a look at an example:

Now… trying to think with your “problem-solving hat” on… what does this balance sheet say about this business?  This is what I notice:

  • This company has a nice stash of cash; pretty healthy sign.  They must be prepared for the seasonality of the wedding industry.
  • This company has a large amount of inventory.  This signals future sales opportunity or stale inventory that has been sitting there.
  • This company has quite a bit of office equipment.  They must have a large space.
  • This company has a LOT of debt.  They have $18,500k in debt.  I bet they acquired all of this debt to purchase inventory and office equipment.  I wonder what their plan is to pay off the debt?
  • This company has $5500 equity.  This is how much the owner has personally invested into the company, or the company has retained from prior year earnings (prior year net income).  They are probably a rather new business given the small amount of equity, or they have not had any prior year income, but maybe losses.
  • This company does not have a lot of equity, especially when compared to debt.  The ratio of debt to equity is $18,500 to $5500… or 18.5 divided by 5.5, which equals 3.4… meaning they have 3.4 times the amount of debt that they have equity. 

See how that works?  Once you draw these conclusions from the report, it’s time to ACT.  It’s time to plan for the next month, the next year, the next several years.  What are you going to do with this information?  You are going to better your business!  VOILA!  The magic of numbers!

The Profit & Loss

The Profit & Loss (or P&L or Income Statement) shows how much money you have earned or lost over a period of time.  It compares your revenue (sales) to your expenses over a year, a month, a week.  You determine the time period that you would like to analyze.  Let’s take a look at an example:

What does this P&L say about this business?  This is what I see:

  • With only $17,900 in net income, this company needs to do more to be more profitable.  It needs to a) increase sales, b) cut costs and expenses.
  • 63% of this company’s income is from Product A, 30% is from Product B, 6% is from Services… maybe there is an opportunity to increase promotion/advertising on Services so that number is higher… maybe this company should adjust their sales plan.
  • Again, with only $5000 in Services Revenue, this seems to be a great place to increase sales.  Typically services do not have high costs of goods, the margin is probably pretty good.  How can we increase these sales?
  • Profit Margin for this company is 75% is pretty good.  How could this company decrease their costs even further to have a better profit margin?  Are they wasting dollars on inbound freight?  Are they sourcing from the lowest cost vendors?
  • Payroll and Rent are the highest expenses, each making up 29% of this company’s expenses?  How can these expenses be cut?  Is a high-cost employee doing administrative tasks (filing papers) instead of working on sales activities?
  • With small net income of $17.9k is the rent expense merited?  Should this person move to a smaller facility or move their office into their home?

You see how knowing the number gives you great control of your business?  What do you think?  Are you feeling it?  Do you see where I’m going?  Are you getting to know your numbers a little better?

Tomorrow, we’ll review how you can plan for the future by knowing your current financial state.