Every year when you and your accountant meet to discuss your financial statements (i.e. Notice to Reader, Review Engagement or Audited) ask your accountant
-what do you think?” It’s amazing how many clients we see where they don’t ever ask their accountant to give an opinion about what the financial statements say about their business. In one case where a client did ask their accountant said “I think other people own more of your company then you do”. This comment weighed heavy on the client as they thought their business and performance was commendable. Their profit and loss statement certainly looked good – good sales, good gross margin, etc. – but their balance sheet told another story. The client was carrying a lot of debt and based on a simple valuation of the business it appeared that creditors had more at stake in the business then the business owner had.
Your financial statements are a recording device for all of the work that goes into your business. What revenue is earned, what expenses are incurred and what is value is left over. When reviewing your financial statements with your accountant you may be surprised to learn what they can tell you about the numbers. Business owners can get caught up in the romance of the business and the ideologies of how great their business is. This is important but understanding what your numbers are telling you is important as well.
Recently I was reviewing a four month year to date comparison to the previous year for a client seeking working capital. In reviewing all of the line items the two that stood out the most were the labour expenses in relation to the gross margin. In the previous year the business had produced more gross margin with less labour compared to current year where the labour and gross margin did not correlate to the previous year. When brought to the attention of the business owner we learned that they were anticipating a busy year and were staffing up to get ready for it. As the business was already into it’s fourth month we discussed the labour trend that was developing and the gross margin trend that was developing. The business owner realized that they needed to use up their labour capacity and went out and secured a big order.
The exercise of asking someone “what do you think” when reviewing financial statements CAN (not always) produce some interesting discussion points that a business can create action items from.
”Being busy does not always mean real work. The object of all work is production or accomplishment and to either of these ends there must be forethought, system, planning, intelligence, and honest purpose, as well as perspiration. Seeming to do is not doing.” –Thomas A. Edison