Mistakes to Avoid and Tips about Small Business Financial Statements – Small Business Show 138

It's September 27, 2017 and this is episode 138 of the Small Business Show. Welcome to the Small business show at BusinessShow Co, the show that's by, for and about small business owners. SHANNON I'm Shannon Jean in Lafayette, California and this is a spot where my co host, Dave Hamilton usually says he's coming to us from Durham, New Hampshire. But Dave is out this week, so we're going to do things a bit different. I'm going to fly solo for the first time today. We're going to talk about a topic that has hammered and bothered me during my entire small business career. And that's accounting and financial statements. And I know it doesn't sound very exciting, but trust me, hang out for a bit with me today and I guarantee you'll learn a tidbit or two. Or even better yet, when you listen to me, you'll have some advice from me and you can send a comment to feedbackusinessshow Co and correct me where I'm wrong and give me some advice. And I would love it. So let's jump right in. Let's talk about some of the most common mistakes that are made related to accounting and financial statements. And the reason I'm coming at you with this topic is looking back at some of our interviews. As you know, one of the questions I always ask is, you know, what's the best mistake? And I'm making, quote symbols with my fingers there. What's the best mistake you've ever made during, you know, your small business career? We always ask these folks and over and over we hear one. A very common response to that is it's something related to accounting, the software not doing something right, financial statements. So I thought it would be good for us to get together and talk about some of this stuff and talk about some common mistakes. So I'm going to assume that you're using some kind of accounting software. QuickBooks, Account Edge, you know, Microsoft Dynamics, whatever it is that you're using to track, you know, the money and expenses and things in and out of your business. If you're not doing that, obviously that's the first step you need to get into. But it can be challenging too. Just, just on that. I mean, I've, I've always had two different systems in my businesses and it can be challenging to keep things reconciled. So you really have to be on it. You know, we've always had either, you know, a strong web presence with a, you know, online point of sale, if you will, CRM software tool that I've, I've loved that part of it because I could build something that. And make it work the way I want it to work. Exactly. Versus a piece of accounting software that's, you know, for a small business, you're buying a piece of off the shelf software and it's not very malleable. You can't really change it up too much, so you have to adapt to it. And I'm not very adaptive like that. So I'm constantly butting my heads up against, you know, how do we make this work when I can make, you know, a piece of web software jump through, you know, hoops and do anything we want, but then we have to export that data into our accounting software. And we've done it in multiple ways and had, you know, in between apps, cleanup things and then getting it into accounting. So that's something you really have to work on. But we're going to jump in, we're going to talk about financial statements. First thing I want to talk about is, you know, do you know how to read them? You know, if you went to business school and you know, you're certainly much smarter than I am and you know what's going on with your P and L and your balance sheet and you know what all those numbers mean, that's awesome. And that's going to help you be all that much more successful. But if you're like me that didn't go to business school and just started a business because I fell in love with a product, you know, the Mac and Apple products back when I was in college. I didn't have a lot of background with that, but I knew how to make money. But there's a big difference. You know, the way I like to look at it is you can be very good at making money, but building wealth is, is much more difficult. And your financial statements are what helps you to build that wealth. So if you don't know how to read them, you're stuck. You can't even get started. And you need to be able to read three documents. Your profit and loss statement, which is, I think, one of the easiest things to read because you can see, okay, if you're buying inventory. I bought this stuff, I bought it for a hundred bucks and I've sold it for 150. And then here's all these expenses I incurred, you know, whatever, gas for my car, Internet, all this kind of stuff. You can just see it. It's a great document. I think a little more difficult to interpret is the balance sheet and what those actual numbers mean and what trends. It can help you spot how things are going with your business, because you need to know how to read it and interpret it. Because certainly if you ever have to go borrow money, the. The bank or whoever you're borrowing, they're going to know how to dig into it very deep, deeply, and you need to be able to answer their questions and respond to any concerns they have. So you definitely want to do that. One of the easiest ways to do it is to ask your accountant to show you. Just say, hey, sit down and show me line by line, what each of these things means and how it's reflected. And then it can work great. If you don't have an accountant, I'm going to put a couple links up in the show notes up@quickbooks.com they help you walk through the balance sheet and the P and L. And as well as the third document I think you need to be able to understand is a cash flow statement, which could be arguably the most important thing for you to understand, because cash, as you know, and we've said here on the show many times, is the lifeblood of your business. You know, profits are incredibly important, but if you run out of cash, you're really in trouble. I'll also put a few other links up there. You know, easy to understand things that'll help you understand their statements. But I really would suggest you have your bookkeeper or your accountant sit down with you and kind of just walk through everything and show you where red flags are. It's like, oh, you know, you want to keep. Take a look at this ratio. You want to do that. So, you know, definitely do that before you go any further. The second mistake I think is, and I make this mistake all the time, is not reviewing the financial statements frequently enough. I tend to focus on the top line, which is, you know, I'm really driving sales and revenue, trying to grow things. That's the fun part of the business for me. I love that. I'm good at that. That's where my skill set is. But often because I don't review the financials enough, they come back to bite me in the ass where I'm thinking, oh, we're doing great. I know we're making money because I bought product X for a buck and sold it for two. And you can't run it on your gut like that. You know, you're not going to build wealth. You can make some money, you can make a living. But I think you really need to get well beyond that. How often is Enough, certainly monthly and certainly towards the end of the year, maybe you need to do it a little more frequently than that because you're going to need to start making some decisions that are going to impact your financials. And you need to look at that with plenty of time to discuss it with your accountant, your business partner to see what's what. The best decisions are related to timing and so frequencies, kind of dependent, but certainly I think you need to look at them monthly. And one of the things I just mentioned, another common mistake, is focusing on revenue instead of cash. You know, it's just, in my experience, it's easier to focus on revenue, but it's not usually not always the right thing to do. It's another benchmark and obviously you have to grow it or keep it steady. And when revenue drops, it's a cause for concern. But the cash is the lifeblood of your business. Like I said, if you learn how to create and understand a cash flow statement, it's going to help you on that revenue front as well, because you're going to see that flow that comes in into your bank and it's a direct reflection of how your revenue is doing. But you can spend yourself right out of business. I mean, I've almost done it a couple times where, you know, you just can't. How can we not have any cash when things are going so good and you really need to focus on that cash flow? I think it's one of the least understood documents and I'm speaking from firsthand experience because I've made every single one of these mistakes and I often continue to do it because I get excited about, look, you know, revenue, everything's going up. And then, you know, if I don't jump in and take a look at the cash flow and the balance sheet, something may be off. So take a look at those things and do it frequently so you can catch problems back to how often you ought to do it. Dave's not here to keep me moving forward, so I'm going to jump around a little bit as I, you know, think of these things. But another problem with not reviewing them frequently enough is that you'll miss things, you know, little problems that you could kind of start to see as an account looks strange or things aren't being coded correctly, which can happen a lot. If you have a, you know, let's say an expense account that's, you know, not being coded correctly, you can be fooled into thinking you're making a lot more money than you really are. And that can hurt you on the cash flow side of things too. And I've had this happen where again, I look and say, wait, you know, we're really profitable. How come we don't have any money in the bank? And often if you wait months on end, these things get, they, they balloon up where if they're small, when you look at them at the end of the month or maybe the 15th, you know, for the previous month, you can, you can catch those things sooner. So. Now, another area that I think some would consider a mistake. I've really been challenged with this, but I think that sharing your financials or a subset of your financials with your employees is a really good thing. It's a difficult thing, but I think I have some points to make that you might find, you know, useful. The first thing, if you're going to share it, you have to break it down or break it into pieces because, you know, you need to keep some stuff confidential. Primarily salaries and things. You know, I know you can read online about, oh, you know, this company lets everybody see the salaries, but in my experience, that's a huge mistake. And you know, that's just a confidential piece of information between you and the employee. But you can break out chunks of things or consolidate, you know, salaries can go into one account. You can have your, you know, numbers in there as well, or if you're taking a draw, an owner's draw, you can pop that out. Or you can code your own officer salaries and just not include those. But probably putting it all together, I think is great and you want to make it clear when you, before you get started is that, hey, this is obviously important information. I want to share this with you. I think you'll find it very valuable. But it's, it's confidential. It's our trade secrets. This is, you know, really important. Everybody understands that. You know, if you have an employee manual, hopefully you've had them sign a confidentiality agreement that's in there, but you want to share that first. And, you know, I'd like to keep it light, but you want to make sure they understand it's important, serious. The main reason to share with, you know, financials with your, with your employees is so they understand exactly how your company makes money and where all the money goes. One of the problems I've had, and I'm not great at sharing this information with my employees because I, you know, for a number of reasons. One is I feel that so much of it is beyond their control. Lower level employees especially that, you know, so many of the expenses they have no impact on. So to bring that out as a tool or a hammer, if you will, to, it's like, look, look how much money we're spending here. Well, you know, the guy in the warehouse has no impact on that. But that's wrong. You know, they need to know what it is, what it takes to run the business. And, you know, so, so you, you can explain how we really make money here and then where all the money goes. Because if you don't share this information, I guarantee people think you're making a lot more money than you really are. And that's a, that can be a problem because, you know, they, they judge on the way they see things. You know, what kind of car does the owner drive? You know, are you traveling a lot? What's. I mean, just lots of other stuff. And I think that the employer employee relationship is such that the employee is always going to think the employer is taking more money than they probably are and that the business is making more money. And so I think it's a great habit to get into. I think you have to structure it carefully. But I definitely think it's worth sharing. And again, you're going to share general details, a subset of your financials. You're not going to break it down crazy. But so they're going to learn, you know, how you're making money, where the expenses are, and you're going to use it to compare, you know, past current and past and current performance. How we're doing, how we did last year, and you're going to compare it to where we're at now. And I think you're going to set. Use it to set future expectations. You're going to develop this system to, you know, okay, do we want to grow revenue? Are we trying to double our revenue? Are we trying to grow by 10%? What is it, you know, what are the company's goals? And so it's a great opportunity to tell them, hey, you know, okay, last year we did a million dollars in sales. This year we'd like to do, you know, 1.25 or whatever, you know, the numbers are. And I think then you can also use it to explain that growth just for the sake of growth isn't what we're looking for. We're looking to maximize the return on that growth. So if, you know, if you're doing a million dollars and you do, you know, a million two, five, and you didn't make any extra money, is it worth doing that extra business? So, you know, you can get some insight into that and talk with them. Again, you want to keep it simple. You got to remember that these folks, for the most part are not going to be listening to a podcast like this. They're not going to click on the links that I'm going to put in the show notes to help you get educated. They're not going to talk to your accountant. So you're going to need to explain it. And maybe you need to have your bookkeeper sit in on your meeting and, or invite your accountant to come over and help explain some of the terms to them. I think you can be really productive and having a finance person there can head off some of the, you know, maybe uncomfortable questions that get asked. I don't know, you know, something that might come up like that. Again, making it clear that this is confidential. I kind of loop around and mention that a few times during your meeting. And then maybe the most important thing, you know, you're trying to be transparent with them. You want to tell them that because I think most small businesses are not sharing their financials with their employees or a subset of them. But if you're going to be transparent, you have to follow through with it. You know, everybody in your company wants to make more money, including you. So if you set some expectations and say something like, hey, if we hit these marks or you know, if the system we're creating works and it generates X, you know, number of additional dollars in profit, we can all make more money. Well, you, the next time you have that, you know, meeting about financials, if you've hit those benchmarks, you need to follow through and make sure it happens to them if you want to keep their confidence. So the, you know, sharing the financials can be tricky. It can be a double edged sword. But I think it can be a really powerful tool. I wish that I used it better, you know, during various times, you know, in my career and very small businesses that I've owned. But I think it's worthwhile if you're doing it. I would love to hear about it. You know, I love to have you on the show or if you want to send an email to, you know, feedbackusinessshow. Co, we would love to hear your method. It would be great. Another common mistake is only talking to your accountant around tax time. Again, I've made that same mistake. You get so busy and so focused on the, you know, what's going on or meeting, you know, setting the system up and hitting those benchmarks that you don't often take the time to take a breather, go talk to your accountant, show them what's going on, or your bookkeeper, if they're giving you that guidance, it's definitely worthwhile because you need help. They're going to see things that you're not looking at because you're not an accountant, you're not a finance person. And especially again, towards the end of the year, you want to talk with them ample time before the end of the year, you know, few months ahead. Because let's say you had an incredible year and you generated tons of profits. Well, your finance advisor, your accountant, your bookkeeper can help you maybe offset some of that by looking at your books at, hey, I know we need to buy a new whatever, forklift racks or whatever, a company van. You're going to pay a lot in these taxes or the business is going to be, you know, hit these tax numbers. Let me give you some options for how to offset those. We've had that happen where we had a, you know, a great, you know, two or three years with one of my businesses and got to the point where he said, hey, we really need to, you know, set up profit sharing and a 401k program that will, you know, disperse some of these funds into not all the employees accounts, but, you know, the owners of the business accounts and do some matching. And there's some great tax planning there that you can use to reward your employees, employees and yourself and mitigate those taxes that you would otherwise have to pay. But you can't do it in February, March, as you're coming up on tax season. And again, I've made this mistake all the time. I don't think I've filed a corporate tax return in April in years. We always are pushing things out and getting extensions and things, but there are certain decisions that have to be made before the end of your fiscal year. So if that's, you know, end of December, then you need to do it and give your, you know, accountant plenty of time. Maybe you need to have a different fiscal year if, if the, you know, holiday season, you know, October, November, December, if that's your biggest, busiest time of the year. And you just can't think about, you know, meeting with an accountant, going through stuff because you're just hustling to take advantage of all those sales. You know, maybe your fiscal year needs to end in, you know, September so it's done. And then you're. You're talking about it during the summer when things are a little, you know, more calm and then you're ramping up in your first quarter. Is, is really the, you know, first year, I think, you know, I think Apple does that and certainly there's some reason for that. So I think that's really important. And so what I've got is I'm going to put some information up on the website@businessshow.co I'll put a few links up there. Some accounting things are not hopefully too dry. But you know, quick read here and there and take a look and you know, come over either to the support group up on Facebook@businessshow co Facebook or, you know, send an email feedbackusshow.co we'd love to hear from you and either tell us your story, ask your questions. If we can't ask it correctly or answer correctly, we'll point you in the right direction. And again, you know, I'm not a finance person, not an accountant, this stuff. You really need to follow up with your team of advisors and get some additional clarification on things. But you definitely want to take a look at it and we wish you nothing but the best. Thanks for hanging out with me today as we ran the show all on my own. Hopefully it wasn't too bad for you and we will be back with you next week. Keep living the charmed life.