Edmonton Business Coach | Financial Statements Boot Camp 5

Okay guys, we’re going to go through, uh, how to read your financial statements quickly and who am I going to have matter? What is this I’ve gone through? Okay. So number one, um, when you’re reviewing your financial statements, I’ll give you some general rules. Number one, you’re going to review your balance sheet before your income statement. All business owners love to review their income statements. The problem is, is that usually if your balance sheet is wrong, your Edmonton Business Coach income statement and the wrong, if you look at the balance sheet first and get comfortable with it, you’re going to start to recommend, uh, you’re going to start to understand where there’s likely a mistake. So before you make that major decision to go purchase a piece of equipment or lay somebody off, it’s nice to know you’re making that decision on an accurate number. So where to start is always review your Bouchee first cause it’s going to help you flush out the errors rather than making the income statement and get excited for press after.

The second thing is we always looked at that in comparative, uh, we call it six months comparatives. So you’ll see on this one, it’s May, June, July, August, September, October. Because one of the most powerful forms of the analysis is actually just seeing how that compares to the history. So don’t review your Edmonton Business Coach balance sheet just on the current uptodate. You want to review your balance sheet over the last six months. Where did it, what did my cash balance finish in May and June and July and August and October. So, you know, in November you’re sitting here looking at this report and you have something, you compare all these numbers too. So it starts to make you start to have that reasonability. Is it reasonable or not? So Matt, Matt used the word counting before you as a financial advisor. Do you think more ramble? Most people would actually look at their balance sheet first that they want to see their incomes things.

Oh, I just want to say the bottom line I was did that makes that quarter and year. I don’t really care about me. If I can just say just like turn bottom line. How often does that wrong? As far as, how often could that statement be wrong? Yes. Oh down to times. Um, I mean, like you said, the balance shoes where you were, that’s really the worth of the company and the assessment of the company, the income statement, you can hide a lot of things on the income statement. Balance sheet becomes a little harder. And really I’ve got to day cash flow is really the most important thing in business. So one of the lines I always try to live by is if someone can explain it to you simply, they don’t understand it well enough themself. So if you’re not getting an explanation that doesn’t make sense to you.

You know, one of the biggest things I tell all the counselor, they come to work for us and it’s your Edmonton Business Coach job is no longer to do about the accountants. You’re not trying to explain it to accounting professor anymore. You’re trying to explain it to a business owner who’s never taken counting before. Uh, so you have to be able to explain it for the assembly. So the first place that, what should happen first is your, your uh, your cash account. It should be first. One of the big mistakes I see a lot of business owners make is they have like eight different bank accounts in their business and it just becomes a, it’s a chance for errors. Uh, there’s probably very few circumstances that you’d be more than one. Um, when people was like, well, I have one to set aside my GST, you want to cite us that my corporate tax, I have this one set aside for capital improvements.

And then they just make mistakes transferring things back and forth and trying to record it. So have one, he goes at the top, um, tell, pay something specific. It’s like an electronic funds. Trust the cow. Then we undeposited funds, this is one that airs, hang around in a lot. So undeposited funds would be, you collect funds but they haven’t yet hit there. Your bank account. So to normal scenarios for undeposited funds is someone gives you a check, uh, you know, send somebody an invoice and they give you a check and you put it on your desk, but you put it into quickbooks. It’s now an undeposited funds and it doesn’t go into the RBC checking account until you actually go to the bank and make up the positive. Now that was the old school way. That doesn’t happen as much anymore. What tends to happen now if someone pays you by a credit card and you get the credit card payment and it hits here, but then the Manera, so whoever else or you’re using, you know, it doesn’t deposit to your bank account to later that day or a few days later.

Okay, so it’ll go into undeposited funds first. And if they’re already checking account second, and then I’ll tell you a common area you’ll see on this undeposited funds sometime if you’ll see something you like and you saw it as (600) 012-0604 and that was before you also saw a (600) 014-0600 for a month before. It’s always this, it’s never clearing out. It’s never going to zero. That generally means that there’s something in there that really it’s not clearing out because it was a fictitious in mountain, never got deposits to the bank. So errors, we’ll hang around in undeposited funds. And if you see a balance, it’s never clearing out or a balance that stays the same. One month over the next, there’s a, you know, high percentage chance that there’s an error counts receivable. So accounts receivable is who owes you what at any given time. Okay? Um, so what we’re looking at this guy, he was old, $8,033 and 23 cents. Okay. I look back into history. People who owed them between 8,069 and 8,033 so it’s on the low end. Uh, but within the realm of possibility, what if I saw 8,069 here and 8,069 here?

Can I start bringing me cast? Yeah. He’s not collecting that $8,069. Right? I would never see that. And if I was looking at cohort in a vacuum, so when we do our monthly meetings, but they’re outsourced accounting clients that were functioning as they’re carrying the bark and CFO, we always present it to them in this form. Six months. Comparative Balance Sheet. First six months, comparative at income, state and sec. And the reason is because we just want to make these records as good as possible and see is there any errors on these statements before we move on to the next month. Okay. Next area, property, plant and equipment that we want to give this one to go over.

Yeah. So this is where all of your, uh, your equipment, your Edmonton Business Coach vehicles, your, um, if you have rental properties or you own your, uh, location, um, it’s all going to be there. And this is another area where I’ve seen people put so many categories, they should be grouped in about three to four or five categories of most, unless you’ve got a very, very multifaceted business. But if you’ve got a contractor business tools, that’s your account, you don’t mean to put, you know, every single type of tool that you have and group them into categories as tools. Um, they’ll all appreciate the same and so you may as well just keep them in the same account. If you want to keep a list on the side to understand where your business is at. That’s something that’s more you can do on your own, but, um, there’s no point putting that on there.

Um, and amortization, depreciation basically mean the same thing. Um, this is when you, when you invest in your business, you don’t get the full expense of that. So if you buy a vehicle or you buy a building, buy a tool, uh, over accounts have different minimums of what they’ll use in terms of small tools and they’ll expense or it’ll be a capital asset. So an asset in the company, um, you can only expense a portion of that every year depending on what kind of asset class it is. So like a computer that basically depreciates, appreciates fully on all about three years to 50% depreciation, I think at least when I would remember it. Uh, if you have equipment that can be somewhere between eight and 20%, um, things like that. So, uh, you only expense that. And that’s why the income statement can sometimes lie because you’re thinking you’re not making much money, but the cash flow is actually there because some of that’s a lot of depreciation that you put into the business.

Um, I’ve had a lot of people that say, Oh, I’m not making any money. It’s like, no, if we look at the cash, it’s mostly cashed here because you’re expensing vehicle kilometers and amortization. That’s not actual cash. It’s going out of your business. Um, but yeah, that’s what that is. There. You’ll see, you’ll see what’s your own, um, all the amortization depreciation on it. And if you take those two numbers, that’s essentially the book value of the asset. So that’s what it’s worth on the books. If you ever hear of book value, if you sell that, if you sell it for more than book value, that’s again, if you sell it for less than book value in them, that’s a loss. Um, and the difference is what it’s worth at any given time.

Yeah. So I would suggest most people in your Edmonton Business Coach middle and threshold to put something in the assets. It’s going to be $1,000. Cra will tell you it’s $1. It’s just if it has a useful life, economic life with more than one year, but our is to be material here, right? Not a bright to the penny. So ask yourself is did this thing cost me more than a thousand dollars? If so, does this thing have a useful economic life of more than one year if not expensive? If it does, you’re probably going to add it as an asset. Um, counts payables, what you owe other people any given time. These abouts should be fairly self explanatory.

And then we get into things like uh, uh, the year and accruals is zero there. What we have the federal corporate tax family, you realize that that’s negative. You can see that that’s negative and it’s getting bigger than negative numbers getting bigger every month it goes from 5,000 to 6,000. Here the provincial tax goes from 2,900. There’s actually that one stays at 2,980 negative amount in your corporate tax payable account. It should be a good thing. It means you’ve prepaid something towards next year. So this would mean he’s paid everything off from last year and he’s already started making installments towards the next year.

Okay.

Um, your current portion of long term debt is usually a number on your Edmonton Business Coach balance sheet that you don’t need to know anything about. It really shouldn’t change month to month. Your accountant should have adjusted for you at year end. So if you see your current portion of long term debt or current portion of capital east has changed month to month, there’s likely an error. Some of them is classified something there. You look at the vehicle, what should the vehicle and do every single month. We’re now go down by a very consistent amount and if you don’t see it go down, if you’re looking at it, there’s probably a, a payment somewhere on that loan that’s sticking somewhere else on the income statement share of the loan. So you share all the loan it, you know, it’s generally going to be a negative number during the year because that means um, you owed the company cause the salary and dividends a be declared at the end of the company and should go up by the amount that you’re taking out of the company each and every month. So this guy’s taking out, you know, just under 5,000 bucks a month went from 45, nine 10 to 50 to 50,007.

So that is the money that you took out of the company every month. So if we were to stop right now, this guy has to declare salary combination of salary and dividends to cover all 50,007. Makes Sense on the balance sheet, let’s go to the Hague and stuff.

And then you can tell everybody the seatbelt only talked about the ache of the financials or 15 minutes of the whole eight hours. So same thing on the profit and loss and you want to review your profit and loss statement on a six month comparative basis. Again, we’ve looked at the balance sheet now and now we’re looking at the profit and loss. Um, so we look at this and he had income of 39,715 so his gross income at range between 32,000 and basically a high of 56,000. So 39,000 is within the realm of possibility that looks plausible based on those comparatives. Uh, but again, if I was looking at this, you know, you look at how many files do you look at and you look at this and one month period I would have no idea that that number is reasonable or completely off the reservation.

Um, then we have the subcontractors expense, the construction materials. So we go back to the gross profit section that we’re talking about four in the business plan. So every time he books a project, he has to pay subcontractors and he has to buy materials. And really you don’t have that 39,000, uh, 16,000 was used for that and he has $23,000 left in gross profit. And then those are what we would call his direct costs of sales. Then we get it to a payroll is next. So there’s something very, very important about, uh, the financial statements and specifically the profit and loss statement on how we organize them in terms of order of accounts. Now when you see their highest first, so two ways to do it, you can do it in alphabetical or you can do it in numerically descending order. So you can see where ranking all of the expenses, payroll, the first auto and truck, second professional fees, third interest and bank charges, insurance, telephone office.

And it’s just numerically descending or because what’ll happen is business owners tend to get fixated on accounts that are very tangible to them. They understand that well they seemed easy to fix like interest and bank charges. He spent $870 on interest in bank charges. Probably the biggest things that credit card fee and if he’s collecting any of the payments by uh, you know, credit card interest and he’s expecting a painting, credit fees and credit card fees and collecting those amounts. But how much difference would it make to this guy? In what? Let’s look at his phone bill. Pick on the phone bill against what if think you produced that phone bill by 10%. What’s 10% of $241?

A little bit over $24.

What if he can increase his gross margin by 10%?

Significantly more.

I mean as a, there’s a reason why we ranked as I tell people that you have limited time.

Okay.

You know, you almost want to draw a line in your Edmonton Business Coach financial statements and you probably want to dry. Like in most businesses you might have read most of the time it ends right here that payroll expenses and know he has really old complete a few levers that he can pull. He can get more income, you can pay less for the subcontractors and the materials and he can change how much he’s paying that the site supervision people. Um, every other number beyond that point is really gonna not amount to a, uh, really anything like in this month, 2,700 bucks. I bet you bought new tires or got something fixed on the truck. Um, so that’s what we always rank these things in numerically descending order cause that’s where you need to be devoting your time here. We naturally want to go to places like interest in bank charges and telephone and office cause they just seem like let let’s, let’s, let’s do that.

I currently right now believe I have two extra form loans that tell us and I still need to deploy someone on that and I’m not quite sure what they would, they are going to cost me but I know exactly what my revenue is going to be next month because that’s where I’m focused. That’s my number. I know what my staffing costs is going to be next month because I know every other expense doesn’t matter. Um, you know, in terms of what my profitability is, you are not going to be successful or unsuccessful because of what you do here in your business isn’t going to fail or die because of what you do at the bottom half of that overhead expenditures. Your business might be slightly more successful or slightly less successful by the time you spent here, but your business is going to live or die based generally on your revenue, your direct costs to sales, your payroll, and in most businesses you’re also going to have rent and potentially the amortization on the equipment to everything else after that is uh, someone on my team is going to have to call him to tell us at some point to figure out why I have been paying an extra 80 bucks a month or something like that.

Because are going to cost you for that phone call. Yeah, exactly. I’m going to pay someone four hours straight. All these steps I don’t hold will tell us and fight with people back and forth. Right? So it’s not an immediate payback for me. So if there’s a new client and Bernie to walk through the door, we’re going to take care of the new client ready to walk through the door first. That could be hard for people to shift that mindset because you gotta realize that all of these numbers just there like icing on the cake without these numbers, you don’t have a cake to begin with and you just got a little bit of icing stuck on a knife. This is all you have. So, um, that’s what you need to be looking in your Edmonton Business Coach financials. And when we went over this, you know, fairly quickly. Any questions on that one? I don’t whether they should.

Yeah, I would be looking at like a ratio for him. I would be really concerned about what is gross profit is on all of those projects. Right. Um, so if I was sitting in front of your quickbooks file right now, I’d probably run that ratio and see, you know, what is that ratio each and every month on the gross profit, every other ratio and this business, I’m not even, I don’t even care because even as payroll expense, like in this business, he probably has one guy. I’m looking at 2,600 for a thousand bucks. It’s either, it’s either going to go to eight or it’s going to stay four or it’s going to go to zero. There’s not much choices. They’re like, it’s not like we could adjust that specifically, but he had been his job slightly different. You can put a little bit more profit margin.

So the only ratio that would be any value on this bile probably would be just a gross profit margin. Yeah. So again, we could go through ratios aren’t all of these other numbers, but that’s where we start. You know, majoring in the minor a little bit on small business. And remember the most important number in small business, it’s 168 like it’s 168. That’s the most important number that is she in pretty short. Suppose one business. Um, you can have some balance sheet ratios that I’ll get into it. I really don’t. Especially in terms of your Edmonton Business Coach collections, uh, you know, what are your Siebel’s how long has that taken to turnover? Um, usually my business buys, they’re going to favor more heavily towards, well, why are you waiting for them to pay you anyways? Why can’t we get, you know, why can’t we get deposits third for any through ICAP, we charge a mobilization fee.

Um, so I’m not going to look at most of the time I probably wouldn’t look at what that collection ratio is on a small business. I would be looking at how do I just completely obliterate that ar right. I want to get that ar for 150 a month. I want to get it to 15,000 o’clock. I’m going to get one 10th and probably looking at more of a process change rather than optimizing. But yeah, that’s a good question because you know, they’ll drill that into you in accounting school. You know, what’s that ratio and also what’s that days that a collection and I’ll just be saying, well, why are we waiting from the pay us anyways, I you want me to get to know? Yeah, it, it, yeah, will depend yet. I want to say that some of those businesses,

that’s the current ratio. Essentially how much cash you have to be your Edmonton Business Coach liabilities or the next, how many months essentially, how quickly will you run out of catch in? A lot of companies go out of business because they take on another job and another job because they can keep making more money and then, but they don’t get paid for awhile and then they run out of cash and then the bankrupt, it’s a good company. They’re doing a good job, but they get bankrupt because they run out of money. Um, servicing while they’re waiting for other things to come in. So keeping an eye on or cash balance and how much that’s going to flow to you while you are waiting to get paid. If that as the industry standard.