5 Ways to Make Financial Reports Clearer
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Recently I visited my college friend Alice—a friend from college, fellow small business owner… and now my optometrist. As she was checking my eyes out, she tried different lenses in the phoropter and ask “Which looks better, this,” and after making and adjustment, “… or this?” During this visit, I thought about a common accounting problem: financial statements, especially the profit and loss report, aren’t clear. When they aren’t clear, we’re less likely to understand and appreciate what these reports are trying to tell us about the condition of the business if we bother with them at all. Fortunately, accounting software is highly configurable, so let’s look at five changes that will bring clarity to reports and lead to more profitable decisions.
Use Account Numbers
Accounting programs order accounts alphabetically by default. However, we can reorder those accounts whatever way we want by assigning account numbers. My recommendation is to order accounts generally by highest amount so the “big ticket” items are at the top of the report. Here’s an example of how account numbers reorder and clarify reports:
Revenues |
Revenues |
||||
Products |
$25,000 |
40000 |
Services |
$200,000 |
|
Services |
$200,000 |
41000 |
Products |
$25,000 |
|
$225,000 |
$225,000 |
Don’t Get Too Detailed
A profit and loss report should be between two to three pages long for most businesses, which means that there will about 60-90 income and expense accounts. If the report gets much longer, we tend to lose sight of the bigger picture. There are different ways to get to the details, using classes and items, which we’ll get to in a moment. But in principle, start with limiting the number of income and expense accounts.
[Tweet “5 Simple Strategies for Making Your #Business #Financial Reports Clearer”]Group Similar Income and Expenses
Grouping similar items helps us simplify complex lists, and just like biologists use taxonomy to group similar life forms, we can group business income and expenses. QuickBooks does this by letting us create accounts that act as “header” or “summary” accounts and then related income / expenses related to that account are placed under those. For example, this QuickBooks sample file gives us an example of how accounts are grouped and totaled:
What makes this so handy is that we can look at the same report in either detailed or summary form:
Use Cross-Tabulated Reports
Many businesses have different offices, divisions, service lines, or geographical areas and need to compare profitability among them. In QuickBooks we can do this with classes and in Xero by tracking categories. In our first example from QuickBooks here, we see that all business without knowing how each service line is doing:
But with classes, this business owner can see how their construction and remodeling divisions are doing, and having this information, the owner can make informed decisions about how to manage each division.
Use Items to Track Details
Finally, every accounting package lets us create multiple items as products or services to put on invoices and sales receipts, each of which points to a specific income and / or expense account. In this example from QuickBooks, we can see that all of these different items will show up in one income account and one Cost of Goods expense account.
This is much better than setting up separate income and expense accounts for each item in the profit and loss report itself!
In addition, items don’t have to be used for just things that show up on invoices and sales receipts. For example, a business might want to track health benefits costs by employee. Rather than creating new expense accounts, we could set up QuickBooks items for each employee that would allow the expense to show up on one health insurance expense line. Thus, the profit and loss report would have one line, but the item report would show the details by employee.
Conclusion
If you’re looking at reports and sense that things don’t look right or they aren’t clearly telling you what you need to know, then adjusting the software to your needs is likely part of the solution. Consider these five areas, and see if adjusting them make your financial life better.