Looking back at when I started my practice from scratch, I laugh (cringe) when I think about how ignorant I was about how to run a good practice. I can’t believe I even survived. What I loss due to my ignorance, I made up in working incredibly long hours.
Like most of you (and I know many of you don’t), I would do my bookkeeping and look at my monthly financial statements. Back then, the sole reason for preparing statements was for the sole purpose of satisfying my curiosity to see how I was doing and for tax purposes only. Never did I look at my numbers and adjust my thinking or my business strategy based on what I saw. I regarded my financial statements simply as something historical and played no part whatsoever in my future performance.
Do you underestimate the value of your financial statements?
I managed my practice without guidance for about 7-8 years until I had the incredible fortune of hiring Grant Kirkup FCPA, FCGA as my mentor. He looked at my numbers and came up with a whole slew of flaws, and recommendations of ways of increasing my profits. Looking back, it’s shameful how ignorant I was in knowing how to use financial statements for management purposes. Yes, this was something that was taught in my studies. But I never really understood how to apply the theory I had learned.
I have since learned that really knowing how to convert financial statements into a tremendous valuable tool takes years and years of practice to master. Year after year, I’d meet with Grant. Year after year, he’d look at my numbers and saw things I never really noticed and was able of making tons of extremely valuable recommendations that made enormous difference in my profitability. His insight always fascinated me and impressed me to no end.
With years of working with Grant and him continually coaching me on how to act based on what he saw in reading my financial statements, I was able to now make better decisions and more importantly, tweak my financial statements in such a way to provide me with better information to act upon.
The other thing I learned in reviewing statements with Grant was learning what other information I needed to fine tune my decision-making process. For example, something Grant taught me well (I think) was to really understand the link between revenues and cost of labor. So, my salary represented 70% of revenues generated. Is this reasonable? No? Okay, so how do I correct this? Well of course, I would need to know each employee’s productivity compared to wages paid to them individually so I can clearly define which ones are tremendously profitable and which employees are getting paid more than they are worth and/or require some training. Which resulted in me implementing an excellent time and billing software that allowed me to see each employee’s utilization (percentage of time charged out) and realization (actual effective charge-out rate). Only then did I have the tools needed to act appropriately to improve the revenue to wage ratio.
How does one learn this extremely valuable skill?
Well, there are several ways. One could simply go back to school and relearn what we already learned. I suppose that’s okay. But I sometimes find the theory is hard to apply in real life. Here are a few more ideas on how I believe you can improve this important skill set:
1/ Do like me: Hire a mentor. Someone who really knows the accounting/bookkeeping business and have this person review your financial statements with you. Ensure this mentor has a good track record and already proven to be extremely successful and really know his stuff. Also ensure that this person is not afraid of calling you out on your stupidity. I sometimes find that some consultants are too afraid of hurting people’s feelings and will not be as brutally honest as they should be. This is something I really appreciated from Grant. He never pulled punches, despite how much the lesson hurt.
2/ Attend as many practice management conferences as you can. Some of the presenters will provide tremendous insight on how to better read and use your financial statements.
3/ Compare your statements with a colleague and challenge each other. This is quite an interesting and sometimes very sobering exercise.
4/ With your permission, I will make a plug. In 2023, I published a 122-page manual that provides all kinds of examples and things to look for when reading financial statements based on what I’ve learned in building my practice over the last 30 years. This manual was constructed for accountants and bookkeepers and comes with a video that walks you through the content of this book.
I hope this article will motivate you to:
- Prepare statements every month without fail.
- Improve your statement presentation to make them more useful.
- Learn to use them better for management purposes.
Admittedly, helping people better understand and use financial information is something I really enjoy doing. Should you be interested in receiving a free consult on your performance, please don’t hesitate to call or email me. And please know, there’s no shame. There’s no way you’re more ignorant than I was when I started my practice.