How to intentionally review financial reports

by | Mar 5, 2022

Financial reports are the bee’s knees. They give you a solid, big-picture understanding of all the little financial details and moving pieces in your business. Then, from there, you can start making educated decisions, working on problem areas, and improving your overall business. And, without them, you’d be stuck guessing where your business stands based on your bank balance, then taking potshots in the dark, and hoping for the best. But, at the same time, financial reports can be incredibly overwhelming (especially when you aren’t familiar with them). There’s a lot of info, a lot of numbers, and a lot of strange accounting concepts. So, they’re frequently just given a cursory ‘ah yea, those sure are numbers’ glance and glazed over.

While lazily reviewing your financials is better than not reviewing them at all, financials exist to be learned from (and for the IRS to figure out how much you owe them). And, it only takes a few simple questions and a little intentionality to shift from casually reviewing them to actually digesting them and learning from your financials. Next time you sit down with your financials, set aside 30+ minutes to reallyyy review them, review each line, answer your questions, and check your assumptions. Then, take those lessons and implement them in your business.


What am I hoping to learn? :

We review reports to learn, not just to check them off our to-do list. Before reviewing a report, start with the end in mind and seriously ask yourself, ‘why am I reviewing this? What am I trying to learn here?’ That could be something very simple (like reviewing a Profit & Loss to learn if you were profitable last month) or more complicated (like reviewing a side-by-side Profit & Loss to learn if revenue is trending up or to review the marketing spend to revenue ratio). But, try to avoid ambiguous questions and takeaways like ‘is my business doing well?’ Well is subjective. There is no universally correct answer.


Do I need more detail? :

You don’t need the perfect, all-encompassing report to learn. You need enough, correct information to quickly and accurately answer your questions. Anything beyond that is a fancy, feel-good way to procrastinate. But, a lot of people get stuck in the search for the perfect report. Instead, once you know what you want to learn, check if the report has enough information to show you that. For example, if you want to learn about basic business profitability, a standard Profit & Loss has more than enough information to learn from. You don’t necessarily need intense detail. But, if you specifically wanted to review your employee costs, you might want a report that breaks employees down into ‘Billable Employees’, ‘Admin/Support Employees,’ ‘Employee Benefits,’ ‘Employer Taxes,’ ‘Contractor Expense,’ etc.


What’s the takeaway? What are my next steps?:

Every lesson should have a takeaway or action item. There should be a next step for you to take what you’ve learned and use it to improve what you already have. (And, that’s exactly why every one of these emails ends with an action item.) When you’re done reviewing reports, genuinely ask yourself what you can do with that information, what problems can be fixed, and what situations can be improved. Sometimes, it might be very little things (like canceling that software subscription you forgot about). Or, it could be very big things (like reworking your invoicing process to speed up collections and reduce outstanding Accounts Receiveable). Regardless, there should always be something, even if you’re just reviewing reports to keep a pulse on your business.


Read thru it multiple times :

Financial reports are a summary of (potentially) thousands of transactions. They’re dense. You’re not gonna glean all the information on a single cursory read thru. You’ll need to review it a few times. First, familiarize yourself with all the numbers and answer big questions (eg, were we profitable? are we solvent? etc). Then, familiarize yourself with all the supporting info (aka, things that aren’t directly related to what you want to learn, but are sorta related and give context). For example, if you’re specifically reviewing employee costs, you’d want to take a quick look at Rent Expense and Software Expense. But, ad spend might not matter. Finally, really review the info you’re there for and ask yourself what it means to you and your business.

And, if you’re reviewing a type of report you aren’t familiar with, you may need to review it even more and really give it time to marinate. Casually review it once, set it aside, then review it again in detail later in the day (or preferably, the next day). For example, I’ve reviewed hundreds of Profit & Loss reports. I’m super familiar with the layout and accounting rules. But, I’m much less familiar with marketing ad spend reports and would need much more time to digest them.

(Note: you might also want to spot-check the report for accuracy after familiarizing yourself with it. Here’s how I spot-check a Profit & Loss.)


Skim thru the underlying transactions :

Cloud accounting software has made it easier than ever to review financial report details. 30 years ago, you had to go find the workstation that had Quickbooks Desktop installed to get those answers. Now, you can just click a number, and the software drills down into all the details. Take advantage of that and drill down into ambiguous categories. You don’t need to study the detail, but make sure your assumptions of what’s inside are correct. For example, what exactly isss ‘Office Expenses’? If you ask 5 different accountants, you’ll get 6 different answers, but what’s included in that category changes your takeaways. For example, Office Expenses could be just petty supplies like tape, paper, ink, pens, etc. But, it could also include a lot of software like Zoom, Quickbooks/Xero, etc. I might not particularly care about your pen budget, but I do care about your overall tech stack budget.


Action Item:


Prepare a Profit & Loss. Save it to PDF. Review all the numbers. Then, set it aside and look at it again in a few days.

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