Tax season isn’t the only time to know your numbers. Knowing where your business stands financially year-round is key to running your operation successfully. It helps you guide your business decisions each month, get future funding and invest your profits properly. It can even help answer some of the tough questions you may be faced with throughout your business’s life.
Questions similar to these:
- Are spending too much on supplies each month?
- What is the ratio of employees’ wages to profit?
- Are you taking too much money out of the company?
- What is your shareholder basis?
- Are sales up or down?
- What is your average profit?
- Are you putting enough aside for taxes?
- Is there something you can do to pay less in taxes?
How can you answer all these questions yourself? By maintaining your profit and loss statement aka your monthly financial reports. Yes, QuickBooks and other accounting software can help you pull your data and place them into financial reports, but does it make sense to you? Can you make informed decisions based on the software’s version of profit and loss?
This is where I come in. As an accountant, when preparing monthly reports for my clients, I look at what helps my clients understand their numbers and design the reports to tell their business’s unique story. We make it a point to make sure you understand where your money stands each month. This way, as a business owner, you’ll become more familiar to the unfamiliar behind business finances. Ultimately, you’ll become more proactive with how your money will continue to perform.
It doesn’t all have to be about taxes or expenses either. Remember, by understanding and knowing your numbers each month, you can answer the tough questions to make changes. Some of those changes could be opening another branch of your business or even selling it like in below’s client example!
A client of ours who sold their previous business was looking into another business to purchase. They called us at CAEA to review the financials of the business they were looking to purchase. We were shocked to see the lack of detail in the financials that the other business presented.
Our client was used to seeing a comprehensive profit and loss that clearly showed items like different income sources, what was making money, what service was too costly to run and how much their overhead was costing them. Our client certainly expected the same comprehensive report from the business they were purchasing as that business was asking a considerable amount (over $500K) for the business.
Instead, the prospective business owners handed us financials that only promoted more questions and inquiries. In our eyes, the lack of detail was a warning sign. As a result of the vague reporting, we compiled a list of questions asking for more details. My client then forwarded the questions to the other party along with a low ball offer for the business.
In this case, the lack of details and not knowing their profit and loss numbers cost the other owners more money when they sold the business instead of generating a profit. If you’re looking to sell or purchase a business in the future, knowing your numbers always helps you to understand the value and worth of the business at all times. This leads to another potential situation wherein you may find an updated profit and loss to come in handy; Securing a business loan.
A new client of ours was looking to secure funding for additional inventory. After going from one bank denial to the next, he decided to change accountants and come to CAEA. We dove into his profit and loss statement to make sense of what the last accountant did to his financial reports.
After re-designing the financial reports to tell the story of what was going on with his profits, we were able to determine the reason why banks were denying him a loan and create a strategy to make his business financials healthier for a potential shot in securing a business loan in the future. Now, this client is on track to making better financial decisions armed with the full knowledge of their finances through an accurate and comprehensive profit and loss statement.
Do you see? Knowledge is power when it comes to knowing your numbers on your profit and loss statement. Now you’re thinking, what about the balance sheet? One look at this report and you can tell if your business is failing. How? That’s our next article…