Reports to Review Monthly to Understand Your Numbers so You Can Increase Profitability
Photo by Firmbee.com on Unsplash
One superpower of financial forecasting is how it helps you visualize what's happening in your business. The spreadsheet we use contains a Profit and Loss by Month, so you see the numbers spread out in time, organized by month. Looking at our numbers by the month helps us see patterns in our business and whether we are profitable or not on a monthly basis.
If you are a tactile person, forecasting is excellent because we look at the numbers one by one, line by line. As you put those numbers into the spreadsheet, you engage with your numbers and connect to them with your body. It's a way of relating to your numbers that involves more of your senses.
This all happens when we do regular monthly Financial Forecasting, but what if you aren't regularly Forecasting? This got me thinking about how to help people connect with their numbers even if they aren't forecasting.
We typically interact with our numbers by printing reports from our bookkeeping software.
If you are a numbers person, looking at the reports can provide the insight you need, but if you're not a numbers person, it may be hard to take it in.
It can be challenging to connect with the flat monotone text. The rows of numbers blur, our minds go blank, and there can be a feeling of disconnection, especially if we don't know how to think about our numbers.
I wonder about our children growing up in a world where they swipe, swipe, swipe, and there's no connection with actual cash anymore. This can be how it feels if we don't do our own bookkeeping. We aren't 'touching' the transactions.
I want to give you some tips about what to look at every month to review your financial situation. Reviewing the following reports is also an excellent way to check your bookkeeper's work and is an empowering skill.
Reports to look at every month:
These instructions will reference QuickBooks Online (QBO), but you should be able to do this in any software.
Balance Sheet:
Pull up a Balance Sheet report for the past month. Review the report to see if it looks accurate to you. It contains the balance of bank and PayPal accounts, equipment, loans, and credit cards. Do the balances look accurate to you?
There is a total for assets (what you own) and liabilities (what you owe). A strong business has more assets than liabilities. A good goal would be to improve these numbers over time.
Click on the dollar amount in the Owner's Draw or Shareholder Distribution category (it may be called something else. QBO likes to name it Owner's Pay and Personal Expenses). This will bring up a list of everything recorded as an owner draw. Ensure these are all personal charges and not business expenses that were recorded there by mistake.
Profit & Loss Detail:
Review this report for each month to ensure that everything is recorded accurately. It will show you what was recorded in each category. If you find something in the wrong category, you can edit it from this report or let your bookkeeper know.
I once worked on the books for a company where the bookkeeper got behind and didn't want to tell the client. They put in lump-sum journal entries to make it look like they were doing the bookkeeping and intended to go back and fix it later. We were able to see this easily by reviewing this report.
Profit & Loss by Month:
You can create this report in QBO by pulling up a Profit & Loss Report, changing the time period to the period you want to review, and 'Display columns by months.' This will show you what happened on a monthly basis which is more insightful than looking at it on a yearly basis.
You can also customize it to add % of Income. This will add a % of Income to each line. The percentage of income is the expense divided by the sales for the month, which shows you what percentage of revenue went to each category.
An example is if contract labor is 35% and your revenue is $10,000 for the month, then $3,500 of the income went to pay for labor. If that percentage increases, you know to focus on controlling labor costs. Alternatively, it might be an area to focus on seeing if you can increase efficiencies to have that percentage decrease.
Looking at percentages can be more insightful than looking at the dollar amount because it reveals the relationship of each number to sales. You can see which categories are creeping up by comparing the percentages.
Looking at percentages and comparing them month to month helps you see where the money is going. Focus on the biggest categories of expense. They are often the most controllable. Small improvements add up to increased profits and cash flow.
Your profit margin is the percentage next to Net Income on the report. Your profit margin is how much income was left over after all the expenses were paid. It is the amount available to pay yourself, save for taxes, pay down debt, and build reserves. Keep your eye on this number. What is your profit margin percentage each month? How can you improve it by increasing revenue and decreasing expenses?
Profit & Loss Compared to the same month last year:
Customize your Profit & Loss statement to compare to last year and check the boxes for $ change and % change.
This report will show you how you did compared to the previous year, which can help you put things in perspective. Look at the categories that have the most significant variances. Comparing similar periods can help you see if the business is improving or declining over time and remember what happened in the past, which may provide unexpected insights.
Action Item #1: Make a recurring time to review these reports each month. Get curious about what's in each category and how your business is performing.
Action Item #2: If you outsource your bookkeeping, ensure you have access to the software so you can poke around and see what is happening.
I hope this helps you feel confident to review reports from your bookkeeping software, connect with your finances, and Love Your Numbers Now.