Do These 3 Things With Your Financials

Prepping the numbers

This week, I gave a keynote to a group of franchisees outlining how to read and use their financial statements (a novel concept).

It started with the idea of "mise en place." If you’re not familiar with the thorough preparation phase before cooking, then let me give you some quick background:

This works on multiple levels too. Both in your business with financial statements, operations, sales, etc. and in your personal life too. Prepare, then act.

So how does this tie into financials?

Let's say the month just ended and our inbox is lighting up with our most recent set of financial statements from our bookkeeper. Do we crack them open and just go at it with our analysis?

Not if we want truly meaningful insights from the numbers. Before ripping into those raw financial exports from your accounting software, let’s take a moment to organize them for proper analysis (mise en place). This will give us a clear picture, make them incredibly easy to read, help us spot trends faster, and give us more reliable data.

Here’s how to do it

The “prep” phase can be broken down into 3 steps:

1. Condense and reformat
2. Get multiple time periods
3. Build common-sized financials

1) Condense and reformat

First, we’ll condense our accounts down to a few key "groups." Have you ever tried reading one those mile-long CVS receipts? Your financials are the same way with potentially dozens or hundreds of line items on your income statement or balance sheet. Instead, whittle those down to 7–15 key groups of your choice for a clearer view of our trends. Stick with some basic categories like marketing, payroll, rent & utilities, and general expenses as a starting point. Here's a sample:

Condensing financial statements

2) Multiple time periods

Don’t ever try to review your financials with just a single period of time in view. Whether years, quarters, or months, always include several time periods. Why? A single year, month, or quarter reveals very little about what's going on in your business. Maybe you're profitable in that single period, but what if it fell 50% from the prior period? I would definitely want to know that when reviewing my numbers! A key rule in financial statement analysis is having reference points for comparison. It should look something like this:

Income statement with multiple time periods

3) Common-size financials

This may sound intimidating but it’s really quite simple. All we’re doing is dividing each line item by revenue during that same time period. For example, let’s say I’m reviewing my last 3 years financials, last year I spent $150k on marketing to generate $1m in revenue, that’s 15%. A common-sized income statement allows us to cleanly compare efficiency at different revenue levels. It suddenly makes $1m revenue and $10m revenue comparable which is very powerful.

Common-sized income statement

Now we’re ready for our analysis! And from that analysis we can build our management action plan. The actual steps and mechanics for that financial statement analysis we'll save for another day.

Takeaway — Before doing analyzing your numbers for trends, insights, actions; take the time to prepare them for maximum effectiveness. Condense your chart of accounts down to a few key groupings, grab multiple time periods (years, months, or quarters), and build a set of common-sized financials for each time period.

P.S. email us at [email protected] if you'd like help with prepping your Q1 financials for review!