A conversation with Great Performances Group team member Tim Dumas about financial reporting in a small business. There are few areas that intimidate small business owners more than financial reports, but without them managing the growth of your business is more guessing than planning.

Tim helps us break this area down into digestible pieces!

Tim, what in your background has lead you to an interest in financial reporting as a decision-making tool?

I am guilty, you might say, of being trained as an accountant and working for two great accounting firms in my business training, BME & Partners and Ernst & Young. It was a great experience not only to  audit, but to also evaluate financial statements for these companies for decision making purposes.

Many great entrepreneurs start amazing businesses due to their expertise in their given field, but without a basic understanding of financial reporting for decision making purposes, a great business may have trouble making effective decisions for long term success.

Making decisions without utilizing financial reports is akin to playing a game without being able to see the scoreboard. A hockey team may play differently if they are winning by three goals, as opposed to if they are losing by three goals. If they do not know the score of the game, they will not understand the aspects of the game that they need to work on to improve and succeed.

If a business owner has never done anything like this before, where would you start with them to teach them the ropes?

Arguably the most important aspect of any business is the management of cash flow. At the most basic level, I would start working with a business to budget and manage their cash flow on a weekly basis. Initially, with a small business, this may be a very brief and simple exercise.

Many businesses have great net incomes, but cannot thrive in the long term due to cash flow issues.

The management of the collection and payment of invoices and expenses is key in long term success. A simple Monday morning activity of budgeting revenue and expenses could allow the business owner to make quick and concise decisions. It is often through this weekly cash flow management exercise that the business owner finds a way to more effectively manage cash flow, minimize expenses and maximize profit (and sometimes its that kick in the pants to drive for higher revenues!).

In the world of retail and hospitality, you have probably seen a few examples of decisions gone wrong because of a failure to turn to financial reports for information.

In the hospitality industry, a good net income is generally 10% of gross sales, while a great net income is 15%. With such a tight bottom line, each percentage point matters on every line of the income statement. If the cost of labour rises from 25% to 30%, this could eat up half of the bottom line.

I am often surprised at how many hospitality businesses do not take the time to adequately evaluate their food and labour costs. Labour should be evaluated on a daily basis and food costs on a weekly basis. A quick daily evaluation of the percentage of labour cost to gross sales will allow the business owner to make timely and effective decisions if the cost of labour begins to rise.

Weekly inventory counts should be undertaken to evaluate the food cost. If the food cost rises even from 30% to 32%, the owner must investigate to correct the matter. Without weekly inventory counts, many businesses do not realize that their costs have risen for weeks or even months. By this time, the business has often lost thousands of dollars of profit.

 Where can a business owner turn if they don’t have a background in analysing financial reports?

They should talk to their bookkeepers or accountants and ask for training. If your accountant is invested in the success of your business, this should be something they happily do. If you are looking for something else, not to blow our horn too much, a business owner should enroll in one of our Great Performances Business Foundations Training programs. The class on finances covers most of these basics. This course is available in more and more communities and is also available online.

What are some of the big gains/wins if you do this right?

Effective and timely analysis of financial statements allows a business owner to see and understand positive and negative trends as they occur, rather than weeks or months after. It is a big win for a business to make management decisions in a timely matter. Money, both going out and coming in has a powerful multiplier effect. Managed badly the damage could be irreversible; managed well it could contribute hugely to the growth and momentum of your business.

The effective use of financial reporting for decision making purposes will certainly lead to greater profitability. If you are going to spend all that money on marketing shouldn’t you make sure it turns into real profits?

Can you leave us with 2 – 3 ‘quick tips’ to really maximize the power of this tool?

Three steps to effectively and efficiently make management decisions utilizing financial reports:

  • Budget and evaluate your cash flow on a weekly basis
    1. The business may have to make difficult decisions to ensure that the bank account remains in a positive position throughout the week.
  • Evaluate and critique your income statement expenses on a monthly basis
    1. Greater efficiencies are always possible. Each month look for expenses which could be trimmed.
    2. Also, evaluate sales trends on a month to month basis and comparing to the same month last year. If sales decrease, when compared with last year, find out why and make appropriate adjustments to change the trend. If sales increase, find out why, to maximize the positive trend and keep it going!
  • Evaluate your pricing on a quarterly basis
    1. Effective pricing is a function of what the guest is willing to pay for it and what it costs the business to produce it. These should both be taken into consideration when evaluating prices.
    2. Also, take the time quarterly to test your competitors pricing; especially if you are in a commodity type of business. While the prices of your competitors should not be a deciding factor in the pricing of your products or services, you should be aware of them and take them into consideration when evaluating your pricing model.

At the Great Performances Group we improve the success of small and medium business anywhere in the English-speaking world. Check us out to find out how. Read Clemens’ book “Great Performances – the Small Business Script for the 21st Century.” Leave a comment or question! A Facebook “Like” is sweet too.

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