You enjoy running your own business and you are busier than ever but all your busyness paying off?  Are you creating a financially strong business?  Meaning, what is your net profit? What is your cash flow? How much equity do you have in your firm? In order to make better decisions for your firm, you need to know the answers to these questions. When you base your business decisions off of financial reports instead of your current bank balance, you will be making solid, long-term decisions.

The risk is part of the thrill of running your own business. Any big decision you make is a risk because these decisions almost always affect—one way or another—the profitability of your business. As to how large a risk, that is for you to decide. When you make decisions based on concrete financial information (I’m talking hard numbers here), this will help you minimize risk and make solid decisions toward the future profitability of your firm. So what should you use to make decisions?

Financial Reports:

This needs to be the meat of your firm. The three main reports you should be looking at are Profit and Loss Statement, Balance Sheet, and Statement of Cash Flows.

Profit & Loss Statement (P&L):

This statement strictly shows the income and expenses of your business. If these items are being recorded and categorized properly, this report can give you great insight as to which business practices (types of income streams or even clients) are your winners, and which are your losers (where are you unnecessarily overspending?). Running a monthly P&L report is a great habit, but don’t let just one monthly overview of a P&L suffice. You can have a pretty P&L but still not be in great financial health. This leads us to the balance sheet.

Balance Sheet:

In my opinion, the balance sheet is the most underviewed and underrated financial report. A balance sheet report is essentially a snapshot of your financial health at any given point in time. This report showcases all of your assets (things you own, ex. office equipment, building, etc.), liabilities (things you owe, ex. loans, payroll taxes, etc.), and equity (what is left over). Ideally, you want to have more equity than liabilities. The balance sheet is the equation of Assets = Liabilities + Equity. If these do not balance (are not equal), you need to take a deep dive into your books and find out why.

Statement of Cash Flows:

So you have looked at your P&L and balance sheet but you’re still not sure where all of the money is going? The statement of cash flows will show you this. This report will show you all the activity of your operations, investments, and financials in regards to cash. It will essentially show the comings and goings of cash for your firm.

Metrics:

Metrics are great to do as well but will only be significant if correct financial reports are in place. Trends and KPIs (Key Performance Indicators) are internal metrics based upon what your firm’s goals are. Benchmarks are more external based upon how your firm measures up against industry averages.

Trends: Using trends or historical reports are a great way for you to gain insight into the progression of your business and forecasting into the future. Once you start pulling these reports on a monthly basis you will start to see patterns and be able to predict the direction of your business. This data is especially useful after you have completed your first year of operating as a business. If numbers typically don’t excite you, I challenge you to pick one trend to focus on. When you start to see the changes, you then start to ask questions about those changes, and before you know it, you may just get excited about numbers.

KPIs (Key Performance Indicators): When you start looking at trends, you also should consider some KPIs (Key Performance Indicators). KPIs can be anything you want them to be. Maybe you want to focus on a particular income stream, debt-to-liability ratio, or the accounts receivable balance. These are targeted items that you choose to focus on in order to better help you reach your business goals. Once you narrow down some specific KPIs you will be surprised by the changes you may subconsciously be making to hit your KPI goals. To learn more about KPI’s check out my post here.

Benchmarks:

I like to use benchmarks as a guideline, but I don’t take them to heart. Benchmarks are great when you want to get a comparison of where your business stands compared to the industry average. Every business has varying strengths, weaknesses, and overall differences in the way they do business. Don’t get too discouraged if you aren’t measuring up against your peers. Again, it’s a very broad scope, and not all aspects of what you do are taken into consideration here.

So what are the best tools to use? Solid financial reports. To achieve solid reports, you need to start with good bookkeeping. Proper recording of income, expenses, assets, liabilities, and equity will give you a solid reporting foundation that you can stand on to make great decisions as you progress. If any and all financial transactions are not being recorded properly, it can really shake things up for your business in the long run.

Metrics are great motivators, but you need your financial reports in place first for those metrics to work for you. Once your financial reports are solid, you can run any metric you feel that is needed for your business.