Blink. Blink. Wow, I’m a mixture of utterly bored and confused…
That’s what goes through the heads of many business owners when they’re running through their Financial Statements. Understanding Accounts or Financial Statements is tricky at the best of times.
I’ve seen time and time again, people wanting to understand but not having a basic grasp from which they can build. Having a basic grasp means you’re able to relate to your financials, and see how they can play a part in your day-to-day business operations. The alternative, which most people take, is using them as a once-a-year tick the box exercise for the tax man.
First though, here’s five quick reasons (none of them tax related….) why you should care:
1. Summarise the big picture:
They’ll show the overall trend, in your business – without relying on your gut reaction, which could be off.
2. Show short term changes before your gut reaction realises:
Real time data can highlight the big picture prior to personally identifying the trend (for example margin dropping)
3. Help you develop an investor attitude:
No doubt, you’re drawing less money from the business than you deserve/want – effectively you’re acting as a bank to your business. Knowing your financials means you’re able to develop an investor attitude towards your business
4. They show a snapshot and an overview at the same time:
Often we focus on the negatives as a business owner. Your financials show the snapshot of the negative today, while also showing the longer-term trend. They’re about balancing what’s happening today, alongside the perspective of what’s happened over time.
If the only thing you got from understanding your Financial Statements is a better handle on the trends of your business then you’re ahead of the game. That’s why caring about your Financial Statements is critical to your business growth.
Don’t let the feeling of being overwhelmed by your Accounts disengage you from them.
Here’s an easy exercise to go through to get a basic understanding of your financials:
1. Log in to your accounting system (we recommend Xero)
2. Pull up your Profit and Loss Report
3. Look at each of the sales and expense categories – do you know what goes into each category (tip: the answer for Motor Vehicle expenses isn’t everything to do with your car – where does petrol go, versus insurance, repairs, or road user charges)
4. Which categories should have correlation, and which has causation (for example, there should be correlation between diesel use and road user charges, and causation from sales to material purchases)
Once you’ve got a grasp of “what causes what” (causation) on your Profit and Loss, and “what goes with what” (correlation), you can take those and see relevant information from your Financial Statements in real time.
Feel free to get in touch for a no-obligation chat about what your Accounts mean – make them relevant to your day-to-day decisions and you’re better able to build your business.