What numbers are important to pay attention to when it comes to your business financials?
Has this ever happened to you?
Do you ever look at the financial reports for your business and wonder what you are supposed to be looking at or looking for?
Do you see the email or the envelope from your bookkeeper or accountant and leave it unopened because you’re not sure what it’s going to be about?
Do you avoid printing your financial reports because you’re not sure which ones are the most important to your business?
If you answered “yes” or “maybe” to any of these – you are not alone!!
New clients often say to me “Ingrid, I have the reports from my accountant and I just don’t know what the numbers mean.”
“What am I supposed to look for?”
“What do I do with the reports?”
“Which ones am I supposed to pay attention to?”
If any of this sounds familiar you are certainly not alone.
Every day I work with clients to help them understand their reports, their financials and their numbers.
Today we are going to take a basic look at one key concept:
Total Expenses or Costs
I am going to show you what numbers are important and what to look for when we look at expenses.
Are you ready? Are you with me? Let’s go …
Total Expenses or Costs
Expenses are the cost of being in business. All the money you spend to run your business. Everything that you spend in a period of time. Some businesses track expenses daily, others weekly or monthly or quarterly.
Where do you find this amount?
The report where you find the total expenses is your Profit and Loss report.
Two different types of expenses that are important to know:
Fixed Costs – may also be called Operating Expenses: This is an important number to know in your business – for every week, every month and every year.
The fixed expenses are the costs that stay mostly the same irrespective of the rise and fall of income or revenue.
For most service based businesses their expenses are fixed operating costs.
Where do you find this amount?
The report to use is your Profit and Loss report.
Variable Costs – these are the costs that change and depend on the rise and fall in production.
These are typically referred to as Cost of Goods Sold COGS and include materials and labor, and depending on the nature of the business can also include freight/ delivery costs.
That’s pretty much it for expenses. My aim is to simplify your approach to the financials in your business.
fixed operating costs
variable cost of goods sold
the next important question:
What are we looking for when we analyse the expenses?
The first thing I have clients do is find a Profit and Loss Report that has multiple months
For example: 12 months across the whole report. If you are using Xero or MYOB or any other software this information is easily available. If you are keeping a manual system, maybe you have a month by month report you can look at.
What we are looking for is difference – let’s say you spend $100 every month on marketing and then suddenly there is a month with $400
We ask: What happened in that month? What happened that makes this amount different?
There are a few things that might have happened:
You had a big promotion and spent more money on marketing
An invoice that should be say insurance is coded to marketing in error
There is a $300 annual cost paid in that particular month …
Or some other reason
As the business owner – you want to know why is this month different?
And that’s what you are looking for with this report – you are looking for exceptions and finding out the explanation
Does this sound like something that you could do?
A slight variation for this is to use a 3 month version and compare to the previous 3 months and/ or the same 3 months in a previous year.
For example – January to March expenses compared to:
April to June of the same year
January to March of the previous year
Comparisons help to highlight the variances and differences.
It’s OK to have variances or differences – so long as you know why they occur.
That’s the first thing you are looking for when it comes to expenses.
How often do you want to look at the expenses in this report?
Depending on the size and nature of your business – you may look at expenses weekly or monthly or quarterly.
Your bookkeeper can create the information – complete the data entry and then you review and analyse it. That’s your role as the business owner.
Once you know why differences have happened you can start to make decisions about what to do next regarding that particular expense.
If you have any immediate questions, please hit reply and let me know or email me Ingrid@healthynumbers.com.a
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- Managing Cash Flow so you never run out of money
- Understanding where your money goes – getting those expenses sorted out
- Understanding the Profit First book
- Pricing – getting it right for your studio
- The things you need to know before signing a commercial lease
- How to make more money
- … and many other topics
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