To provide weekly accounting tips for entrepreneurs, Kahuna Accounting started the “Accounting Clarity for Entrepreneurs” series. In the second video tutorial, Kahuna’s Micky Deming shares what to look for when viewing your business financial reports, as demonstrated on Xero cloud accounting software. Each week, we’ll feature a new how-to video and description based on the questions we get from the many entrepreneurs we work with. Here is the “Your Business Financial Reports, What to Look For” lesson.
See below for a full transcript of this tutorial along with large versions of the images used by Micky Deming in the video.
Hello this is Micky from the Kahuna Accounting team, and this week I’m here to talk about a common question we hear and that is, “What should I look for when I receive my financial reports?”
This is a great question. As an entrepreneur, you want to have a healthy business and grow, but what story does a bunch of numbers tell in determining that growth.
This week, we are going to examine one report – the income statement and what story it tells us.
First, let’s find the income statement in Xero.
To do this, you’ll simply head to the reports tab and click Income Statement.
When you get to the income statement, the first thing to look at is the revenue. Specifically, we want to examine patterns of revenue growth or decline.
- Examine patterns of revenue growth or decline (income statement)
Most businesses have more than 1 product. If you do, take a quick look to see which products or services are contributing more to your revenue.
From this you can ask a series of questions:
What if I spent more time marketing product A vs B?
What if I completely cut out X because I spend a lot of time on it, but it isn’t making a big impact?
The other thing to look at is how revenue increases by month. What is the cause? Did you run a specific campaign? Are there seasonal trends in the business? This can help so you can deconstruct your best months and find ways to make revenue consistent.
- Determine if expenditures are accurate and contributing to the growth of your business (income statement)
Next, take a look at your expenses. When you do this it’s important to ask why about these expenses.
Find the expenses that have more variability or that have made significant changes. You should know why these went up or down, but the important thing to look at now is whether these expenses are worth the investment.
More specifically, here is a very important question to ask,
“Are these expenditures contributing to the growth of your business or simply reducing profitability?”
This will help you be intentional with your spending and cut out spending that is unnecessary or not helpful for growth.
- Confirm that your business is profitable (income statement)
Entrepreneurs are in business to make money. Even if your business focuses on your passion or purpose you must remain profitable in order to continue to operate. Depending on your business cycle, there may be periods where your monthly earnings increase or decrease significantly. There may also be months where your expenses are higher or lower than normal. This could be due to periodic expenses like running a new advertising campaign, or hiring a new employee.
Looking at an income statement that compares prior accounting periods you will be able to identify if your revenue for the current month has increased, decreased, or remained the same. You will also be able to notice the change in your expenditures for the month. The YTD (year-to-date) column will show you the financial progress for the year as of the date specified on the report.
So take a look. Is your business profitable? Is there opportunity for more profitability?
Find increases and decreases in revenue and expense and see where your opportunities for profit are.
So a quick recap. When you get your financial reports, here is what you should do.
- Open your income statement
- Examine patterns of revenue growth or decline
- View expenses to determine value of investment
- Determine profitability
Thanks so much for being part of this video. If you want more information about Kahuna Accounting or would like help seeing reports like this for your business, just visit kahunaaccounting.com.