Reviewing financial statements begins during your business planning process. The last step of your business planning should be developing your your financial budget. That is what financial targets should your team be focused as you execute your business plan?
Problem is more than half of the business owners I meet with have a written budget. If you don’t have a budget, how do hold others accountable to your financial targets? Are you starting to see WHY you need a budget?
Many owners don’t create a budget because they’ve been taught the wrong way. You can’t create a budget until you know what you want to accomplish. This is why I advocate high impact business planning. It makes you think about you goals and objectives first. Then makes the functional manager responsible for those objectives think about how they will achieve them. Now budgeting is easy, how much money to you need to accomplish the work defined?
But you don’t need all the detail in quickly reviewing financial statements. You just need 4 key numbers:
- Forecasted revenue
- Cost of goods sold (COGS) as a % of revenue
- Overhead expenses as a % of revenue
- Expected net profit as a % of revenue
Reviewing Financial Statements Simplified
With the actual values of these 4 numbers reviewing financial statements is easy! Just compare your actual values for the current period to these same numbers from your budget. If they are within the difference acceptable to you as the business owner, your financial review is complete. It really is that easy!
Now, isn’t that simpler than the process your CPA wants you to follow? Why do follow this simple process? Because, if your numbers fall within these percentages then you’ll reach your annual financial goals.
So, why spend hours analyzing the numbers? Because that’s what accountants do, and your CPA is an accountant.
Successful entrepreneurs spend that time looking for more opportunities to sell their product/service or looking at ways to scale their business. So, start acting like a successful entrepreneur!
When Reviewing Financial Statements Gets Tougher
Now, I’m not bashing accounting. It’s critical to the success of every business. You’ll need it when reviewing financial statements and your percentages are NOT within the parameters you set.
For example, let’s say your COGS percentage is 43% and your target is 38%. You should be asking yourself, why the 5% increase.
Now all the financial accounting you accountant did for you comes into play. You’d look at the detailed accounts under your COGS section in your P&L to see what’s higher than it should be. Is it labor or materials? Then drill into this to see what caused your 5% increase. Was it a onetime anomaly or has something changed for good? Maybe a vendor increased their pricing on you.
So, there you have it. A quick and simple way for reviewing financial statements. Could you take 5 minutes a month to do this? If people know you’re watching, then they’ll become more conscience of what they’re doing. This is what creates accountability in your business, and when this happens hitting your financial goals gets easier.
If you’d need more help setting your budgeting or evaluating your financials let me know. My passion is helping small business owners to become independent and financially free. It doesn’t take long to figure out what’s happening when you use this process for reviewing financial statements.