Your financial statements are one of the most powerful tools you have to create change in your business.
When you understand the numbers in front of you.
When you can interpret what those numbers actually mean in the context of your business.
When you can focus on the right metrics and translate numbers into strategy.
And therein lies the problem for most ambitious business owners….
Standard financial statements (in their traditional format) are hard to understand. Don’t feel bad about that. If you’re like the vast majority of entrepreneurs, you didn’t go into business with an accounting qualification or a desire to gain one.
However, mastering these statements is crucial because they hold the potential to drive informed decisions and transformative growth for your business. Let’s break down the complexities together and uncover how to use your financial data effectively.
Want better insights from your financial statements? Here’s how.
1. Understand what each statement is designed to tell you.
Here’s a breakdown of the 3 key financial statements and how they can be used to drive your business forward.
1. The Balance Sheet: A snapshot of financial health.
The balance sheet provides a detailed snapshot of your company’s financial standing at a specific point in time. It lists assets, liabilities, and equity, offering insights into the net worth of your business. For example, by examining your balance sheet, you can understand how effectively your company is using its assets to generate earnings. A healthy balance sheet with more assets than liabilities indicates a financially stable company, which is crucial for securing loans or attracting investors.
2. The Income Statement: Tracking profitability over time.
Also known as the Profit and Loss (P&L) statement, the income statement shows your business’s revenues, expenses, and profits over a specific period. This statement is vital for assessing the operational efficiency of your business. By regularly reviewing your income statement, you can identify trends in revenue and expenses, pinpointing areas where you can cut costs or optimize
3. Cash Flow Statement: Understanding liquidity.
The cash flow statement tracks the flow of cash in and out of your business, crucial for understanding liquidity. It breaks down cash flow into operations, investing, and financing activities. For businesses, maintaining a positive cash flow is essential to cover expenses, repay debts, and invest in growth opportunities without incurring additional borrowing.
2. Spot trends in the numbers so you can make better decisions going forward.
It’s all well and good understanding your numbers, but your financial statements show past performance, right? How do you use past performance to make decisions about the future?
While it’s true, your financial statements do provide you with historic data, you can use them to spot trends and make adjustments to your strategy in order to improve performance.
The kicker with standard financial statements is how they’re presented. Without sitting down and analyzing those traditional statements with your accountant, it’s not easy to be able to compare numbers over time and visualize your progress.
That’s why we created the District Dashboard as a service for our clients. The dashboard is a visual tool you can use to see and compare the key metrics most important to your business.
We found our clients want to easily and visually see how past decisions have impacted their results. And, in turn, to use those results to make more informed decisions in the future.
Some examples based on the clients we support:
A consulting business might use the dashboard to understand project profitability.
- Trend: Analyzing which types of projects or clients are most profitable.
- Decision: Focus on acquiring more of the high-margin projects and clients.
A doctor’s office might use the dashboard to discover patterns in their expenses.
- Trend: Recognizing which expenses are growing disproportionately to revenue.
- Decision: Implement cost-saving measures or renegotiate supplier contracts.
A biotech company might use the dashboard to track R&D spending.
- Trend: Tracking investment in research and development over time.
- Decision: Adjust R&D budgets to focus on the most promising projects.
A golf course might use the dashboard to see membership trends over time.
- Trend: Monitoring changes in membership numbers and types.
- Decision: Adjust membership offerings and marketing strategies to attract and retain members.
A law office might use the dashboard to analyze patterns in their revenue.
- Trend: Tracking consistent revenue growth or identifying seasonal fluctuations.
- Decision: Plan for resource allocation and marketing efforts around peak seasons or to stabilize revenue.
A retail business might use the dashboard to manage inventory.
- Trend: Monitoring how quickly inventory is sold and replaced over time.
- Decision: Adjust purchasing and sales strategies to optimize inventory levels and reduce holding costs.
A non-profit might use the dashboard to tweak their donation strategy.
- Trend: Identify periods with higher or lower donation levels.
- Decision: Tailor fundraising campaigns and efforts around peak donation periods or to address low periods.
Focus your attention on only the metrics that matter most to your business.
The reason for sharing all the examples above is to highlight that every business has unique goals, operates in a specific industry, and is at a different stage in its journey. What you pay attention to in your financial statements depends on all of these factors.
In order to use your own financial statements in a way that’s not time-wasting, overwhelming or even disheartening, you’ll want to:
- Define clear, measurable goals for your business.
- Choose key performance indicators (KPIs) that directly relate to your business goals and industry standards.
- Use a financial dashboard (like the District Dashboard) to visualize and review those key metrics.
At this point, seeking out an expert can be very beneficial.
As part of our Dashboard service, our clients get a comprehensive report complete with an action plan and a monthly call with the District team to dig into the insights.
I am big into triathlons. These days, with smart watches and sports equipment, there’s a whole lot of data you can get from your cycle, run or swim to inform how you make progress. Sometimes there’s so much information (and some complex and scientific) that it’s helpful to have a professional coach analyze it. They can highlight the data that’s most important so you’re not wasting time and advise you on the levers to pull to see improvement in your training.
Think about your finances the same. The data from the dashboard can tell you a lot about your business. It reveals patterns, trends, and anomalies. Couple that with an accountant who understands your business and knows your goals and you’ve got personalized, data-based advice to help you improve performance.
Request a free demo of the District Dashboard to see the financial trends in your business.
Sometimes examples aren’t enough. We offer a free demo of the District Dashboard so that you can plug in your numbers and see how it works in the context of your business.
In just a few minutes you can understand your numbers in a way you never have before. You’ll be surprised how much more informative (and exciting) your business reports are when you can visually examine the cause and effect of your decisions.
Explore the dashboard service in more detail and give it a try over here on our dashboard page.
