Understanding Your Financial Statement
Business owners always ask us what they need to know when they look at their financial statements: What does this piece of paper tell me? How is my business doing? Sometimes it can feel like they are asking how to run their business. The challenge so many business owners face when it comes to their finances is simply not knowing what they don’t know, and failing to understand there’s no definitive right or wrong answer when it comes to running a business.
If you’re at a loss when it comes to understanding your financial statement, we can help you maximize your financial resources in a few simple steps. The first step to understanding your finances is to analyze your financial statement and determine your current position. If you want to get from point A to point B, you first need to know where you’re starting: your financial statement is point A. Then, make a plan that puts goals in place for your future. See what numbers can be improved next month and outline some ways to make it happen. This will get you to point B. Next, turn that outline into actionable steps; turn those actions into measurable financial results. Applying your knowledge back to your business is the final step.
Let’s look at some examples that show this in action:
Example 1
Restaurant owner A gets his financial statement and discovers, for the second month in a row, his food costs are no longer 30%, but 32%. He reads this and comes to the conclusion that his food costs are rising 2% and his margins have shrunk by 2%. He decides to address this by adjusting his prices and reprinting his menu. The next week, his restaurant uses the new menus, and his sales increase according to the new prices. His food costs return to 30%, and now he’s back to operating according to his budget.
Example 2
Restaurant owner B is losing $5,000 a month. After analyzing his financial statement, the owner learns that he can achieve a profit of $40,000 by increasing sales $25,000 a year, controlling the cost of goods sold to 50%, and holding his operating expenses to last year’s. To hit his $40,000 profit goal, the owner realizes he needs 20 customers a day based on his average dollar purchase per customer. By spending his days controlling inventory, scheduling, pricing, and recording foot traffic in the store, he hits his end goal, turning actions into results!
Since both restaurant owners knew exactly what to look for and where to look, both could get back on track. These business owners were able to use their understanding of accounting to read and analyze their financial statements, draw conclusions from the numbers, apply their skill sets, and execute their goals.
In both examples, the financial statement taught the owner what to look at, and what was important to his business. After looking at your financial statement, do you know what it means to understand your business’s financial performance? Can you read a cash flow statement? Can you look at a financial statement and tell what is right and what is wrong?
Once you can speak the language and understand the story your numbers are telling you, you will have a better understanding of where you’re at and how to move forward. As you look ahead, here are a few management tips that are good to keep in mind when running a business:
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- Learn how to read a financial statement
- Calculate your break-even point
- Re-calculate your break-even point for costs to grow or cash outlays
- Project your cash flow 6 to 8 weeks
- Put a budget together
- Develop a sales budget and review pricing
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Many people go into business because they have a good skill set; for example, they may be a great painter or plumber and have the required technical skills to deliver their product or service. However, few have the skills and tools to effectively run a business.
To get your small business to the next level, you must read and understand your financial statement. Know what your numbers are telling you and be proactive in the areas that require attention. By finally understanding your numbers, your company can develop a budget and make necessary adjustments along the way.
To learn more about obtaining and implementing these skills and tools in your business please contact us or call 262-796-1040.
Recommended Classes to learn more: Business Essentials, Cash Flow Essentials, Cash Flow Fundamentals, and Numbers Mastery Series
