How to read and improve your financial statements and achieve business success
My brothers and I would sometimes get into trouble, both at school and at home.
Though we generally had good grades, my mother would always make a point of reading our report cards as soon as we brought them home.
Walking home from school on that warm day in June, when I was in Grade 7 and Rob in Grade 6, was particularly satisfying. Not only would I head to high school the following year, but (to our delight) we found a garter snake trying to get across the road. Garter snakes aren’t harmful, but they can be terrifying if you don’t like snakes.
Rob scooped up the snake, which was about 45 cm (18 inches) long. Having no bag to stick it in, he dumped it into the yellow manila envelope holding his report card. Reaching the house, we burst into the kitchen and proudly presented our poor, unsuspecting mother with our report cards.
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It was all fine and good until Mom reached into Rob’s envelope. The unfortunate snake seized its chance for freedom and slithered up mom’s arm, almost giving her a heart attack.
Rob and I almost split our guts laughing as we tried to avoid Mom’s swipes at us with a wooden spoon.
Grabbing the snake, we headed out the back door to avoid any further repercussions and released the snake back into nature.
Report cards are as important in business as they are in school. Knowing how to read your report card is essential for keeping your business profitable. Sometimes, as kids, we were scared to read our report cards. As business owners, we’re sometimes in the same boat about our financial statements.
This is what you need to look at if you’re reading your monthly comparative income statement:
Sales income – revenue: Are sales increasing or decreasing? By what percentage? Do you have certain departments that are growing or declining compared to the previous period? Why is that happening? What are the trends in the business? Are you doing anything differently that’s helping or hurting sales? Why are certain areas outperforming others?
The more you can figure out the answers to these questions, the better your chances of success.
Cost of goods sold: Look at each line on your income statement. What’s changed from the previous period? Can you explain the changes? Is there any input cost you can reduce?
Gross profit: Look at the gross profit percentage compared to the previous period. Has it gone up or down?
If the gross profit has gone down, you may need to make changes to ensure this doesn’t continue. What needs to be done?
If it’s going up, good for you. Consider what you’ve done to make this happen. Can you continue to do this?
General and administrative expenses: Carefully compare this area line by line to the previous period. Are there expenses that have gone up? Why have they gone up? What needs to be changed? Are there areas where you can eliminate more costs?
Remember that every unnecessary cost you can reduce goes directly into your pocket as an owner!
Profit: Compare your profit in this period to the previous period. Are you going in the right direction? Have you hit your goal for profit? Are you happy with this number or discouraged? What needs to happen for you to reach your goals?
Remember, you own the business to make a profit. This area is critical.
Many small business owners base their decisions on what’s in the bank on any given day. This is problematic. You’re asking for trouble if you don’t know where you’re coming from, where you’re going or how well your business is doing.
This is like driving a car without a gas gauge or like a sports team not finding out until the end of the season if they’ve won or lost games during the season. You wouldn’t play sports or games without keeping score. Why play roulette with your business by not keeping score?
We need to get beyond the fear of looking at our financial statements. There isn’t a snake in every report card, and you should rarely be scared when you open your monthly financial statements.
Once you understand what you’re looking for and how you can make the changes you need, your monthly comparative financial statements should be something you look forward to.
Dave Fuller is a Commercial and Business Realtor, an award-winning business coach, and business author.
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