This is a question we’ll usually ask a prospective client during our initial meeting. You’d be amazed at some of the responses we hear.The top 5 responses are:
1. I don’t know.
2. I have to ask my accountant.
3. I did/did not pay taxes last year.
4. I have cash in the bank.
5. I can’t trust what comes out of that computer!
It never ceases to amaze us that even some of the most successful business owners we’ve met, do not have a good handle on how their business is performing. It’s really not their fault. In most cases, no one has ever taken the time to explain to owners exactly how to read and interpret their financial statements in a language they can understand.
People’s brains tend to turn off when you mention the terms debit & credit, but if you as a business owner don’t understand this basic building block of accounting, how can you possibly be expected to follow the flow of all of your business’s activity through your financial statements.
We ask all of our clients to present their companies. Usually they’ve never been asked to do this. In order to present your company effectively, you’ll need to include a discussion around the financial statements. Quite often, these very confident and competent business owners get very uneasy because they aren’t sure what or how to present their financial statements.
Here are some of the things we’ll have our clients do to help them understand financial statements:
1. Compare periods of time (e.g. this month vs. last month or last year) to give some perspective to your numbers.
2. Focus on changes in the numbers from one period of time to another (numbers have more meaning when they’re put in this context).
3. Explain how the sale of one of your products or servicesflows through your through income statement and balance sheet (i.e. which accounts are effected and how).
It’s amazing how once you’re responsible for presenting something that you’ll begin to pick it up, especially when you’re talking about an entrepreneur. Once you understand how your financial statements work, you’ll gain a tremendous amount of confidence in being able to track the health of your business and you’ll be able to confidently answer even the simplest of questions like “Are You Profitable?”