Many small business owners fear reading financial statements because they don’t understand what they’re telling them. I find most accounting training programs focus too much on becoming an accountant and NOT on what you need to know to USE accounting to run a business.
Isn’t that really what you need?
Your accountant or CFO should know about accounting. You need to use their output for decisions to more profitably grow your business.
What’s Important When Reading Financial Statements
When I teach clients to read financial statements, the first thing I tell them is they’re looking into a rear view mirror. Your financial statements show you “what happened” in the past or history.
You need to use more current operational reports to get a complete picture of what’s going on. I’ll touch on these metrics a little later.
When reading financial statements you only need to focus on 4 numbers. They tell you if you’re on track or not and if you need to dig deeper into your financial reports. Those 4 numbers are:
- Forecasted revenue
- Cost of goods sold (COGS) as a % of revenue
- Overhead expenses as a % of revenue
- Expected net profit as a % of revenue
Comparing these 4 numbers to your budget will tell you if you’re on track or not. If you are, then there is no reason to dig deeper. You have better things to do with your time like growing your business.
To get things setup for reading your financial statements this way read the post What to Look for When Reviewing Financial Statements. This goes into a little more detail on the setup.
Pairing Accounting with Operational Metrics
You use operational metrics to monitor what’s happening in each business function. BGS calls this method of managing Tuning Your Revenue Engine (TYRE). Watch the video below to find out more.
TYRE help you calculate how much work every person in your business should be doing in order to create the the desired results when reading your financial statements. Learn more about operational metrics from the post Operational KPI’s Drive Profitability and Business Growth.
If this method of managing your business intrigues you, contact BGS Bookkeeping. We can help you figure out these metrics for your business and show you how to use them to grow a self-sustains business.