Why your Financial Statements don’t matter

12 November 2020

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Why your Financial Statements don’t matter (well, sort of), and three things you need to know from them.

We walk into a meeting room with a customer to go through their Financial Statements and Tax Returns. We see a look of fear creep across their face when they spy a tax return sitting on the corner of the table. We sense that and get through the tax bit first.

Then we open the Financial Statements. We then see a look of disinterest creep across their face. The Financials are something like confusing, or uninteresting.

In fact, you might have recognised it yourself.

We push on and try to paint a big picture story of what’s gone on for the business. What it means for the future, and how they can exploit the opportunities available to them. But, when a business owner has glazed over they’re gone.

So, at this point the Financials don’t matter in the slightest.

To be honest though, even if you have stayed awake, how much a particular expense is up or down really doesn’t matter in the slightest. What does matter though is three main trends. Ask yourself:

1. What’s happening with my Gross Profit Margin?

Here we’re looking at the cents from each dollar of sales you’re keeping for yourself. Sales, minus direct costs to sell what you sell.

Trending up, fine. Trending down, not fine (unless your sales are going through the roof which is uncommon in the current environment). The trend matters more than the underlying raw numbers which can spike some months – the trend is the generally story, not a particular number.

A trend either way in your Gross Profit Margin can indicate that your efficiency is changing. Ask yourself where in your process it could be (for example a café could have more waste in the kitchen, or a lawyer could be going back-and-forth with their customer too often), then get the raw data. Run through the data with your Accountant and get them to help you see what’s happening deep in the numbers.

2. How are my Overheads tracking?

Again, any spike in a particular number doesn’t matter (unless you’re on a slash-and-burn exercise). It’s the trend we’re looking at – what’s the overall spend looking like, not the nitty gritty of why your motor vehicle expenses are up 24%.

Now there is a time to nit-pick. Often though 12 months down the track isn’t the right time. The right time is when you’re budgeting and coming up with your benchmark.

So, when you’re looking at your Financials, look at the trend in the Overheads and use that as a trigger to ask yourself if you need to manage the spend better (for example through budgeting).

3. What’s my Cashflow looking like?

Given how the last year has been, the old saying of “cash-is-king” is truer now than ever. Your Financials paint a picture of where your Cashflow is heading.

Without diving into jargon, debtors up, creditors up, bank down is the picture we’re often seeing. The overall trend is cashflow tightening, which in turn creates pressure. Use the Financials, with your Accountant, to identify the trend and then calculate how much capital your business needs to avoid any cashflow crunches (especially over the summer break).

So, what do I do?

Firstly, stay awake through your Financials. We 100% don’t expect you to find them as exciting as we do – but there’s a story painted by your Annual Accounts. Work through your story with your Accountant.

Then work through your raw data to look at how you can influence the trend in your Gross Profit margin.

TIP: a lot of this comes down to the setup in your Xero account – checkout our Xero page here to find out how to get your Xero account in shape.

Look at how your overheads are tracking. You’re not going to fix a cost blow out retrospectively though – manage any increase in spend through budgeting, reporting against budgets monthly, and avoid slashing costs for the sake of it.

TIP: Ongoing monitor of your performance is key – read more here.

Finally, make sure your Cashflow is strong. An undercapitalised business is a business with tight Cashflow. Work with your accountant calculate how much working capital your business needs. Proper capitalisation is important both in grammar and in business.

TIP: Read more on cashflow here.

If you’d like to know what you really need to know from your Accounts reach out. We promise to try and keep you awake, and to not be too excited about a page of numbers.

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for more help feel free to reach out. Get in touch with Hamish Mexted