“In God we trust; all others bring data.”
― W. Edwards Deming
Let’s talk about something every business owner should know: financial statements. You’ve probably heard of income statements, balance sheets, and cash flow statements. But do you know why they’re crucial for entrepreneurs like you? If not, don’t worry! You’re not alone.
So many busy business owners get caught up in the grind and never bother running reports or analyzing much other than the bottom line. When using financial statements isn’t part of the strategy, the likelihood of becoming one of the many of businesses that make it to the 10-year mark is slim.
The good news is that you don’t have to be a financial guru to understand these statements and use them to your advantage as an entrepreneur or executive.
Back in 1985, I had this meeting with my CPA about the ’84 taxes – quite an exciting time! It was my first shot at Tax Write Offs, you know? All that money I had put into LeaseHold, Equipment, and Product was finally going to come back around from the government. BAMMM! Little did I know, it was going to be my first deep dive into the world of income, expenses, and assets. I was quickly learning how it’s possible to wrap up a year with less cash and still owe taxes. It was quite a shift from just wanting to rock a killer salon, do some punk hair, and snap photos… but life had turned me into a business owner.
Fast forward a few years, and there I was, having lunch with two of AVEDA’s super successful distributors. We were chatting about this and that, and then I mentioned my disdain for dealing with financials. That’s when Tom chimed in, reminding me that I was one of the masterminds behind ABC – Aveda Business College. Yep, that was me. I master Financial, to minimize my anxiety. I wanted to be an artist, a teacher and a mentor…. not a CEO. Oh well. The rest is history.
I took the whole Profit and Loss thing and broke it down into these five Expenses KPIs and five Income KPIs. You might wonder where the inspiration came from – well, it was from Jack Stack’s “The Great Game of Business.” See, I’d been mulling over this idea that each team member is like a mini-business, and every single guest is a market of their own. So, my goal was to simplify things and make it easy to measure. You know, set targets, track progress, and do some solid coaching. It’s all about keeping it straightforward and actionable. I hope to do same in this Blog. I will be sharing work sheets and am currently creating a game to make it simple and get rid of fear.
Financial statements are like a snapshot of your business’s overall financial health. They help you determine where you are and plan your next moves. From net worth numbers to profit projections, understanding financial statements is vital to gauge your strength in the market—and your weaknesses. As a CEO of several companies, I’d like to share an overview of three main types of financial statements, why they should matter to you and what you can do with the information on each.
Profit and Lost
P&L statements can be used to identify revenue and expenses, evaluate profitability, provide information to stakeholders and project for the future. This data lets you see trends. Where you show growth and should invest. Do you have “Money” sitting on your “Shelves” not moving. Money that could be in bank or invested in what is “moving”. Remember Pareto 80/20 law. 20% is creating 80% …. 20% is creating 80% (Income, effort, space,…)
They usually include revenues, expenses and profits or losses incurred over a specific period of time. Profit and loss statements, well show you how much has been made, how much has been spent and where you’re sitting financially. The key to survival, and growth is controling your KPIs.
Rent, Sales, Payroll,…. etc. Do you know your Industries KPIs.
Its not about what your making,.. what are you keeping?
“Without data, you’re just another person with an opinion.”
― W. Edwards Deming
Balance Sheets
Balance sheets are reports showing a company’s assets, liabilities and equity at a specific time. A Big picture view of Assets and Deficits. Balance sheets can be used to monitor financial health over a period of time, make decisions related to debt and investments, and attract new investors, get loans and talent.
If you’re looking at a balance sheet for a business, you can do a few things with it.
For one, you can analyze liquidity and determine whether there are enough short-term assets to cover short-term debts. This is done by comparing the business’s current assets to its current liabilities.
All of these uses will lead to one thing: a better overall picture of a business’s financial health. From there, you can make big decisions. For example, because they help pinpoint risk, balance sheets can help you decide whether you can afford to sink more money into capital or need to keep more cash on hand. They can also be used to secure private equity funding and prove that you can repay what you want to borrow.
Cash Flow
The third part of the financial statement trio is a cash flow statement. Cash flow statements can be used to track inflows and outflows and find ways to improve a business’s financial position to achieve long-term goals.
Let’s say you own a hair salon, and you’re preparing a cash flow statement for the past year. You notice that your business had a negative net cash outflow during summer. Being in a college town, town is dead and 100 degree weather means Electric is up (AC)! You’ve spent spend more money in summer than you brought in. You want to use this information to make decisions about your business going forward. A universal example for Salon and Spas is the December Rush and the January Slump. Christmas Singing, Cash Registers Ringing,…. January will be Stinging!
When you have this information, you’ll be able to formulate a plan to keep your business back on track and out of the red. Projections Strategies to increase sales and control expenses,
Final Thoughts
Financial statements are essential tools for every entrepreneur. Not only will they provide you with a comprehensive overview of the financial performance of your business, but they’ll also help you make informed decisions for the present and future.
You can use profit and loss and cash flow statements and balance sheets to monitor financial health in a way that just isn’t possible otherwise.
Still not sure where to begin? One of the best ways to begin is just to dive in. Choose a financial statement to focus on, run the report and start analyzing. If nothing else, you’ll walk away with more knowledge about your business and the best strategies for moving forward.
“It is not enough to do your best; you must know what to do, and then do your best. Profit in business comes from repeat customers, customers that boast about your project or service, and that bring friends with them. If you do not know how to ask the right question, you discover nothing.”
― W. Edwards Deming