As a creative at heart, people often ask me why I love such a “dry” subject as bookkeeping and operations so much. To me, there is creativity is in taking a mundane pile of paperwork and creating function and efficiency. The finished project is reflected in my client’s ability to focus more intensely on their craft – why they started this journey in the first place - and profits and growth take front and center. Your financials can be your biggest source of opportunity and insight into your business, but they need to be immaculate, detailed, and most importantly, understood.
One of the most effective ways for creatives to analyze their business data is to compare quarters. Each quarter represents a season in business and can give you more insight that a month-to-month comparison which can be deceptive with the ebbs and flows of a shorter time full of variables such as bimonthly billing or quarterly charges. But what are you supposed to look at, exactly? Fantastic question! Let’s take a closer look at the essential questions you need to ask and the reports that give the answers from Quarter 3 to crush Quarter 4!
Am I profitable?
Profit and Loss Statement (P&L): What this boils down to is what your NET income or loss is. This report takes all your revenue streams for the stated period and subtracts all of your expenses which gives you that net income or loss. The P&L is the go-to for most business owners to get a peak into their business on the fly, it can give you the first indication of any potential growth opportunities or serious red flags. To use this information for next quarter, set goals to increase profits by 10% or cut expenses by $100 a month (or both if you’re feeling ambitious!)
What does the general health of my business look like?
The Balance Sheet: For small business owners, this report can often be overlooked. But don’t be so quick to write it off, the Balance Sheet is one of the most important indications of your business’s overall health. It is broken down into 3 main sections: 1. Everything you own (assets); 2. Everything you owe, short or long term (liabilities); and 3. The difference between the two above mentioned sections (owner’s equity, also referred to as net worth).
The Balance Sheet can give you the best insight into the big decisions in your business. It is also one of the first pieces of financial data your bank or investors want to see if you are seeking a loan or investment. You can use this report to keep your business balanced. A good starting point is to find the ratio of liquid and non-liquid assets that you can aim to maintain and will help you to quickly identify problems along the way.
Do I have enough money to buy a new piece of equipment, hire an employee, pay my bills? AKA what’s my cash looking like?
Statement of Cash flows (SCF): The Statement of Cash Flows gives you the run down on the cash (and cash equivalent) that is coming in and going out in your company for the stated period. The data the SCF provides will help you get a more narrowed perspective of how you are going to be able to pay all those bills coming due next month. By comparing your cash flow from quarter to quarter, you can see the bottom line of how much profit you are taking in.
Each quarter, you should be using this to set a preliminary budget for the new quarter and then fine-tune it for each month. You can also start making big picture projections on how to maintain your current growth pattern or turn it up a notch.
Every quarter, month, day, and year are a chance for you to look back on how you’ve been doing, in every way, in your business and gives you a chance to learn and try again tomorrow. Knowledge in business is not only power, it’s essential. You have got to know your numbers to succeed. Take the time to dig in, I promise it can actually be a fun process once you understand the fundamentals. Now get out there and crush Q4!