Your financial statements are trying to tell you something! Do you speak their language?
I grew up in Quebec so my first language is French. (You might not know that since I have no accent at all.) Though we’ve been married more than 15 years, my husband still doesn’t understand what I’m saying when I speak French to our boys (even when we’re talking about him). He’s missing out on a lot of very interesting information!
Your financial statements have very valuable information for you, too, if you speak their language. (And I promise it’s easier than learning French.)
Many businesspeople focus almost exclusively on cash. If cash coming in exceeds cash going out—and maybe a surplus is accumulating—all is good, and the analysis stops there. It’s certainly better to accumulate cash rather than drain cash, but if you don’t look any deeper than that, you are probably missing opportunities to improve your business. Better understanding where you earn money (and maybe where you lose money) can help you improve your margin and decide how you want to grow. Time invested up front to organize your financial statements so they provide this insight can yield big dividends quickly.
Key to unlocking this powerful information is organizing your financial statements effectively. All businesses can prepare a chart of accounts that separates revenue and expenses in categories that can be monitored and allocated easily (e.g., material, salaries, benefits, rent, utilities) to prepare a simple profit and loss (P&L) statement. But with only this information, a businessperson can’t make many decisions other than “I need to grow revenue!” or “I need to reduce expenses!” This is true, but not useful! You need to understand where to grow or where to cut. To do so, you’ll need to break your P&L into smaller components, organized by client, service, job, or product.
This is easier than it sounds. Breakwater has for-profit clients ranging from law and accounting firms to construction and contracting businesses to restaurants and retail stores to the creative arts and more. (One of my favorite aspects of this work is learning about our clients’ businesses so we can help them grow.) Almost every one of these businesses has multiple business lines or products with varying costs and profit margins. Organizing a business’s financial statements by component, and allocating costs more precisely, almost immediately yields insight on how to improve.
For instance, you might sell a variety of different products or services. You might think the biggest seller is your “best,” as it generates the most revenue. If you don’t allocate your costs accurately, though—whether time (labor) or materials—you might be overstating the value of one segment or undervaluing another.
Why does this matter? I have worked with clients who, as soon as they more precisely allocated their costs, realized that parts of their business had been operating at a loss for years. As soon as they stopped that activity, they were more profitable.
You might uncover a similar opportunity in your business. And if not, it is still worth investing some time to understand what your financial statements can tell you, beyond just your cash flow. And I promise — it’s easier than learning a foreign language!
Sincerely, Your French Canadian Accountant Extraordinaire, Marie-Eve DeSantis