Feature Article - Reading Financial Statements

Clear Thinking  - Look at the Past to see the Future

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We talked about financial statements last time and how to get them.  And we have talked about some of your statements being historical documents.  The 2 most common financial statements are the Profit and Loss Statement (aka Revenue and Expense Statement aka ‘How’m I doin?’ Statement); and the Balance Sheet.  Both are historical documents.  The Profit and Loss covers a period of time: last month, last quarter or last year.  The Balance Sheet presents a snapshot of your situation at a point in time.

Profit and Loss

The Profit and Loss (P&L) lists your revenue for the period and your expenses.  The difference between them is your profit (or loss).  Sometimes there will be a category of expenses called Cost of Goods Sold (CoGS).  Subtracting the CoGS from your revenue gives you your Gross Profit.  Your CoGS are the direct costs associated with your revenue.  They would be the items you buy for resale.  You can attribute each cost with a particular sale.  If you pay commission for sales it would be a CoGS, but if you pay a sales person’s salary it would not.  If you have shipping costs associated with a shipment of items for resale, they would be included and the cost would be divided among all the items in the shipment.  If you paid shipping to bring in office supplies or shop supplies, it would not be in CoGS.  The rest of your expenses are considered your overhead.  Subtract these expenses from the Gross Profit and you have your Net Profit or Bottom Line.  This amount is also shown on the bottom line of your balance sheet in the equity section.

Balance Sheet

The Balance Sheet lists your Assets – what you have in your business such as money in the bank, money owed to you (Accounts Receivable) plus equipment, inventory and buildings.  Your Liabilities and Equity are how you paid for your assets and they are equal to the assets, which is what makes your sheet balance.  Your Liabilities include what you owe your suppliers, loans, lines of credit, and credit cards.  It also includes money you have collected and owe the government for HST and Payroll deductions.  Your Equity includes money you and your shareholders have invested, as well as current and past profit.

When you look at your financial statements, it helps to have expectations of what you think certain numbers should be.  The best way to figure out what to expect is to look at past statements for norms and trends.  What do you usually make this time of year?  How much do you usually owe your suppliers?  Are your receivables trending up or down?  Do you want them to?

One of the most useful statements for me is an annual P&L divided into monthly columns.  The trends are laid out.  You can see how your revenue and expenses change by month.  If you have several years of them, you can see your business’s ups and downs.  Now all those big sales by your suppliers in January and February start to make sense.  Those are typically slow months for most industries.  Knowing that; you can plan your cash flow, and plan a marketing campaign of your own.

We are only doomed to repeat history if we don’t learn from the past.  Use your financial statements to learn about your business and make the changes that will lead you to success.

If you would like to learn more about how to use your financial statements to increase your business success, sign up for the Financial SMARTS workshop on December 5 at Hilltop Haven.  You’ll work with other business owners to develop a roadmap to success for your business and you’ll learn how to read it. 
 

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I woke up this morning thinking about a corduroy road I found when I was a kid, near where I grew up in Waverley.  It ran/runs parallel to the Trans Canada highway.  It would have been the original route from Halifax to just about anywhere else.  As we walked it one late summer day, I imagined myself as someone from a time before cars; when travel was measured in days and weeks not hours. 

That picture comes back to me now and then.  I wonder what life was like.  Most people were entrepreneurs back then.  They were farmers, manufacturers or shop keepers.  Was business different then?  How different were service businesses? 

The assumption seems to be that we are improving, that we gain new insight and new and better business theories every generation.  And I thought so too, until I read books by or about Thomas Edison, Henry Ford, and Adam Smith.  They had it all figured out ages ago.

Running a store is the same as it was 100 years ago; even a thousand years ago.  The theory remains the same.  Sell what people want to buy at a price they can afford and that allows you to make a profit.  That hasn’t changed.  It is technology that has changed making inventory control automated, customer contact instantaneous, and goods available from around the world. 

This is the same for services, for manufacturing and for selling.  The basics of business have been figured out a long time ago.  The only innovations have to do with using technology to apply them.  Technology has changed bookkeeping from a room full of scribes (think Bob Cratchett) to one person part time with accounting software on a computer.

They say history repeats itself and that every mistake that can be made has been made.  In that case, why are we still making them?  We can model our businesses on existing or historical successful businesses.  Focus on the basics; give great service and have fun. 

The more I look at it, the more I realize it’s all much simpler than it’s made out to be.  Have you ever tackled something new that you thought would be really difficult, only to find it’s pretty straight forward once you get the hang of it?  With good instruction and the right tools, you can take on anything.  It just takes practice to get good at it and it takes practice and talent to get really good at it.

Running a business is the same.  One of the most important tools you can have is accurate financial statements.  Use them to continually practice running your business.  Follow the lead of successful business owners by doing what they did.  You can tell what works by looking at your financial statements. 

If you want to learn more about how to do that, sign up for the Financial SMARTS workshop on December 5 at Hilltop Haven.  You’ll work with other business owners to develop a roadmap to success for your business and you’ll learn how to read it. 
If you have any ideas, comments or blinding flashes of insight about this, contact me.
 

See  the Events page for a listing of All Events:

November 17 -  Judy Hilchie of Simplify! Professional Organizing Solutions will present the 5 W's of networking.

December 1 - Marketing Brainstorm

December 15 - Christmas Party

December 5 - Financial SMARTS for Small Business