Getting the Most from Your Financial Statements

We've all been told that if you're running a business then financial statements are important, but have you ever really wondered if that's true? Honestly, do you really look at them? Does your accountant send them to you so you can then just file them away somewhere, or perhaps you just go into QuickBooks and run them on your own from time to time? Does it seem like only the cash balance matters? If you've filed your financials away without ever looking at them you're definitely not alone. In fact, you might have developed an alternative report that you created that helps you stay on top of your finances.

I was recently shooting the breeze with a CPA friend of mine, talking shop about QuickBooks Online vs. Desktop, you know having a super exciting nerdy debate, and I asked him what software he used to send the monthly financials to his clients. There was a little bit of an awkward pause............... (we were talking on the phone - I know, these days that's considered so old school). "Hello... Hello... Are you still there?". "Yes, I'm still here," he said. And then he proceeded to tell me that he actually doesn't send all his client's financial statements. That service is really only requested by his larger clients who like to review the financials with him on a regular basis. For the rest, they just go into QuickBooks and run their own reports. "It seems easier for them if I just let them know when they're ready and they can review them when it's convenient," he said.

Does this scenario sound familiar? Unfortunately, I think it happens all too often. I mean, maybe you're business is doing great and you're super busy and the only time you have to pause to review financials is at 10 pm in bed on your laptop right? Yep, I think we've all been there and done that at some point.

In fact, that's exactly where I am right now as I write this article. :)

The thing is that your small businesses can surely benefit from a financial review just like all those big businesses out there. They post all the same financial reports (just with more commas). In fact, having an accountant who can also advise you on what you're financials are saying, and who helps you budget, plan for contingencies, and keep on track, is a major driver for how those small businesses got big in the first place! ??

Have you ever gone to the doctor and had a physical and a full blood workup? Your doctor examines you, examines your labs and then provides you with a summary of your health status, what you can do to improve your health, makes recommendations, and provides assurances. Their goal is to keep you healthy, correct any issues, and prevent illness.

Your CFO is like a doctor (of finance), and your business is the patient. Your financials are the lifeblood of your company and must be reviewed and analyzed. Your CFO will report on the health of your company, discover and make recommendations on what you can do to improve that health, and work with you to set short and long term goals. You dont have to go it alone, and you dont have to create the strategy. That can be your CFO's job. Your CFO should be your closest financial business partner. They should know what scares you about your business, what excites you, and what your personal and professional goals are. They can help you develop that blueprint to get you where you need to be.

So let's face it, reading financials can be boring stuff and many of us cut through all the data and go straight to the bottom line. But is that enough? Financials provide the data, but it’s INTERPRETATION that makes the data valuable. In this case, “value” means these reports actually have to help you gain insight into your business so you can make the very best business decisions.

Let’s look at some Best Practices when reviewing your financial statements.

The Importance of Review

Get out of your mind that Financial Review is just a necessary chore. On the contrary, it's an extremely important activity that requires FOCUS. It’s a time to work “on your business” and, with that attitude, you’ll get a lot more out of it.

Presentation Matters

If you're a creative and visual person, you may want to have reports that graph or chart your finances. I have many clients who prefer to have dashboard reports, which illustrate actuals to budget, or prior year comparisons with pretty charts and graphs. Some clients like to see both dashboard reports and traditional financial statement presentation.

The data should ALWAYS lead to a conclusion that's more than just knowing if you made a profit and if you have money in the bank.

That's past thinking... You and your CFO will want to keep your eyes on the future as well. So you're financials should answer questions about your future. Has your earnings ratio improved, has your debt to equity improved, has your ability to borrow or generate capital improved? Are you getting healthier and stronger?

Frequency of Review

This will depend on the business. For some, monthly may be too often. For others, quarterly may not be often enough. Typically, the more frequently you review the financial statements, the less time the review should take.

Review Financial Statements based on Business Goals?

If revenue growth is the main goal, you should have customized revenue reports that you can review on a more frequent basis, daily, weekly, or bi-weekly.?However, if growing enterprise value is the main goal, revenue trends may be less important. Structure your analysis of financial statements around what you are trying to achieve in the business and focus on those areas. Remember, goals change over time so should be revisited periodically.

Business Goals and Owner Goals

For many small businesses, business and owner goals may be identical. But things can get complex. What if you have a partner who's planning to retire soon and sell his/her shares while you're committed to long-term business growth? Is it possible for two people, both with different goals, to get their desired outcome from one business? Yes, but it requires a serious strategy which means you gotta be connected to your accountant and your business financials.

Ask yourself - How does your business work for you? Or are you doing all the work?

What is going to Change?

Financial statements paint a picture of the past. Ok that's great and it's important that it's accurate but it's after the fact. Nothing you can do about the past. Leaders may already have made decisions that will fundamentally change the future business performance, e.g. capital expenditures, new product launches, mergers & acquisitions, downsizing, opening or closing offices, key hires, etc. This may make an analysis of SOME historical data irrelevant. Best to focus on the ROI of these future investments and have a financial forecast that models the impact of these future decisions.

What to Review

There are so many options, but a good starting point is the performance of the previous month and year-to-date. Next would be to compare those results to what was expected (the forecast) and to look at any variance from last year over the same period.

Trend Analysis

What’s changing in your business over time? Maybe in the last 12 months your revenue’s growing at a lesser rate than in the previous two years. But profitability’s increasing over the same period. This will only be revealed by looking at longer-term trends. It’s helpful to isolate a couple of metrics you want to track. Presenting trends graphically is helpful.

Accounts Receivable and Inventory

Cutting costs is one way to access more cash but there are often opportunities in ‘Aged Accounts Receivables or aged Inventory’. Poor collections processes prevent access to cash that has already been earned and increasing your inventory turn, is another way to improve cash.

Tax Projections

A reality of business is paying taxes. Understanding your obligations (and how you’ll meet them) and the impact on your cash flow can reduce the burden of worrying about tax. Of course, this leads to a discussion on a tax mitigation strategy. If you're not having these conversations, you're probably paying too much in tax.

Compliance with Contracts?

Financial statements present one aspect of the business but they don’t necessarily capture ALL consequences of business decisions.?Example:?The financial statements reveal that rental costs are way too high and are negatively impacting the business. A purely ‘financial’ decision would be to cancel those rental contracts… but that may not make sense where cancellation terms impose penalties on your business or could hurt operations and create inefficiencies that are costly. Consider ALL the implications of business decisions. My clients never enter into any contracts before I can review them and discuss the business implications. You shouldn't either.

Human Resource Concerns

Businesses are made up of people. A business may have the best products in a great market with limited competition… but if the people are not productive or can't collaborate, the value will not be created. The Financial Statements can give clues on general staffing concerns, employee turnover, retention, recruitment and/or training costs, litigation, etc. Really, they can...

Compensation

Are the current compensation structures working? Are the incentive plans actually incentivizing employees to be more productive or remain with the business? Financial Statements provide guidance on this.

Succession

Every business will – at some stage – go through a ‘succession event’, that is, a change of (complete or partial) ownership. It may feel like a long way off but many leaders ignore this until they can’t properly control the process and they don’t get the best outcomes for the business or the owners. Financial Statements provide one data point as to the value of a business and this may warrant discussion from time to time.

Meeting Agenda

It’s impractical to try and discuss all of these issues at every finance review. It’s much more sensible to consider the highly strategic, long-term discussions on an annual, semi-annual, or quarterly basis. The more frequent reviews should look at tactical questions and ensure you are on track to achieve the strategic goals. A business in distress will need to be hypersensitive to its predicament which requires a flexible approach with quick action. Like all business meetings, a financial review should generate “WHAT, WHO, WHEN” – a list of actions to be taken to improve the business.

Again, each business is different so you should implement the Best Practices that make sense to you. Please get in touch to improve your understanding of your Financial Statements so you can enable the best possible decision-making for your business.?We can help –?contact us?to get started.