8. Mini Series: Reporting and Understanding Your Numbers

Bookkeeping

Aug 21

Welcome back to The Accounting Edit Podcast.
I'm Leah McCool with Orca Accounting.
And I'm Aminder Mann with Sequoia CPA.
Thank you for joining us.
This is the last episode of our mini-series, and we are calling it Reporting and Understanding Your Numbers.
So this is really just the final aspect of the accounting cycle, really, just at a minimum, you have reconciled your bank accounts, you've taken care of entering any bills into APAR, there's so many topics that we covered.
But this is the last bit that once you are ready to close out your books for the month, or if you're just reviewing your financials in general for a year or for a month or a quarter, this is the piece where it involves reviewing and preparing your profit and loss, your balance sheet, your cash flow statement, your statement of retained earnings, if that's something that you care about, and really just not just preparing it, but understanding the pieces of it, and really being able to read them as a business owner so that you can really fully understand the financial story that your company is telling.
Yeah.
And Leah, I came across a really interesting fact about understanding financial numbers and literacy.
So this was a survey done by Intuit QuickBooks of April this year in 2025, and they found actually 42% of small business owners admitted that they had limited or no financial literacy before starting their business.
And this cost them around $118,000 in loss profit.
So this is huge, and I think this is why it's so important to understand what your financials are actually saying at the end of the month.
So depending on the frequency in which you want to review your data, I think it's incredibly important.
Not only do you review it on a regular cadence, but also understand what are the metrics, what are the areas to focus on so that you can have a thriving and successful business.
Because that $118,000 can make a huge difference on if you stay open next year or if you're having closed doors.
So again, we'll kind of go through this, what our process looks like, what as a business owner you should be looking at, and what trends you can kind of look at as red flags, spot, and how we help our clients in this area as well.
And if you're not wanting to do this yourself, you can lean in and find a financial partner that will help you with this.
So really, the first step is the financial statement.
So one of the main ones that most business owners look at is the P&L, and that's the profit and loss statement.
So this really shows your revenue, your expenses, and then the net profit, meaning your revenue minus your expenses.
And when I'm looking at it at month end for my clients, I'm really looking at a number of things, not just what are the numbers, but comparing the month over month, right?
Really looking at what is the data trying to tell you?
What's the story to the numbers?
And that's where I like to kind of read into, okay, what did revenue look like last month?
But maybe what did it look like last year, the same month?
Has something changed drastically?
Are we decreasing?
Are we increasing?
And same thing on expenses.
Are there categories that you're overspending on that you could cut back in?
Are there reoccurring software expenses that you are no longer using that you could dig into and terminate and have the cash flow back on that end?
And then what is your net profit at the end of the day?
Are you losing money?
Are you making money month over month, year over year?
This is kind of the high level of your P&L that you want to look at.
And that's just one of the financial statements.
Leah, the other one is balance sheet.
What are you looking at when you're looking at a balance sheet?
A balance sheet is a snapshot of your business' financial position at a single point in time.
So it answers, what do we own?
Which are the assets?
What do we owe?
Which are the liabilities?
And then what is left over for the owner, which is equity?
So this is essentially assessing how stable and solvent your business is right now.
So to further explain the balance sheet, it is made up of three main parts, the assets, liabilities and equity.
So to break down assets a little bit further, this is saying what your business owns.
This includes cash, accounts receivable, inventory, equipment, vehicles, anything that really has value and can be used to generate income.
And so this is really just what your business has available to it and is assigning that value to the business in terms of positive resources.
On the other hand, liabilities include what your business owes.
So this covers any loans that you have taken out, any credit cards, any unpaid bills, taxes you owe, anything that could be owed at a future date.
And so for a credit card, because you have not paid that off yet, you have to use your assets to reduce this liability.
And so this is really showing, okay, how much is your business on the hook for at a future point in time.
Then your equity shows, okay, after liabilities are subtracted from the assets, then this shows what is your investment in the business as a business owner.
And this also shows what earnings have been retained over time from your profit and loss.
And so this is really the foundation of double entry accounting, because everything has to balance on the balance sheet.
This accounting equation is the value of the assets has to equal liabilities plus equity.
And so the reason why it's called the balance sheet is because at the end of the day, that has to balance, like balance sheet has to balance.
And really, it just shows you how strong your financial foundation is, how much cash do you have versus what you owe, and it really just helps you assess if you can afford to make these big decisions that you have coming up.
So for our example, for Michelle, right, she is a photographer, she has several bank accounts, they're all in the positive, but then the liabilities are where her credit card is going to show up.
And that's something just to keep an eye on, she may think she's doing fantastically, but having that frame of reference of how that's showing up on her balance sheet is really going to help her understand how much of this money that is in my bank account is actually mine to do something with and reinvest in my company or take home.
And so there's just a lot of complexity to being able to relate the two financial statements that we just talked about together and make sure that everything is getting categorized to the right place so that it's at a very minimum showing data accurately.
So then you can then look at the Profit and Loss and Balance Sheet and see, okay, what is this performance telling us?
What decisions can we make from here?
And I think that's super important, Leah, that you mentioned.
It's one thing to be able to read your financial statements, but it's another thing to be able to understand how different accounts relate to one another, and that's where the story really lives.
And that's where a lot of those financial decisions come into play, because that example you used about credit card liability, you could have a large bank balance, but you do have a liability, and you need to know when is it owed.
And so if the owed liability is greater than your cash balance, the story is different than if you had no credit card liability sitting there, right?
So you really are looking at not just the data that's sitting there, it's how it all relates to one another.
Yeah, I completely agree with that.
And so, for example, I know that we've both seen some red flags when just taking a high-level overview.
What are some red flags that you've seen in some of your clients' financial statements where you just think instantly, okay, there's a deeper story here, and I want to figure out what may have gone wrong?
I think the one really obvious one is negative cash.
So if you're seeing anything on the balance sheet with a negative cash balance, you need to dig in deeper because there will be some statements that transactions may be duplicated where it's causing a negative balance.
There may be transactions that are missing that are causing that negative balance.
So this is where looking at the bank statement, comparing it to what are the transactions living in your accounting software, and making sure it aligns is super important.
And this is why all the steps that we've mentioned in this mini-series, including the reconciliation is incredibly important.
But negative cash is one of those glaringly obvious issues that sit down on the balance sheet.
That is something that definitely is interesting because if anyone has had a bank account, then they should know that the only time that your bank account should go negative is if you've overdrawn it.
And usually that's not in the thousands.
It is very rare that that actually happens.
And so, it really is just, it's something that you may see that it's negative.
And either when you see that, you don't really know what it means, but even if you have some inkling, you may not know how to fix it.
And that's a huge part of where having that accounting training comes in so helpful because not only can they recognize that that's an issue, but they can also help diagnose the problem and fix it for you so that your financial statements aren't wrong at the end of the day.
Yes.
And I think another area is really growing liabilities.
So if you're seeing a credit card or any sort of liability, if you have a loan and it's increasing, but you haven't done anything to obtain a new loan and your loan amount is going up, you should really be stopping and pausing and saying, okay, why is my liability increasing?
And again, this could be just in terms of booking wrong journal entries or booking wrong entries to the wrong accounts.
And so as someone who's trained in this, we can look over your balance sheet or any financial statement and kind of look at obvious things that stick out and growing liabilities is one of those.
You won't know right off the bat.
You do have to dig in and kind of investigate what is causing this, but we can go in and correct those issues.
And that's part of like the cleanup that I do for my clients is I review their accounts and look at, does this make sense in terms of what their business is, business trends are, and does it align with what's expected?
And if not, I ask questions and we try to gain clarity around it so that you have that accurate data.
Yeah.
Oh, absolutely.
It's very common to have maybe done your own books for a few years, or maybe you've had someone else doing them, but maybe they didn't ever really explain it to you, or it's very important for someone to understand, here's what your business's story is, here's what the financial should be reflecting.
And that's something that it's like running a diagnostic on your car, seeing, okay, what's wrong?
And how can we, how do we fix it?
And basically, here's what we will do in order to have you go forward with a set of clean books going forward.
So your financial statements are correct and then can be reliable to other people, whether it's yourself or any third parties.
Yeah.
And Leah, just a point here.
You and I are trained more on corporate accounting, so we can easily flag these issues.
We see them.
We have been trained in accounting.
So a lot of these areas are second nature to us.
But there is a wide variety of expertise in the industry.
So depending on the type of person you hired, like if you're hiring a very basic bookkeeper, they may not do this level of analysis.
They may not have the expertise to be able to do this.
So it's important when you are hiring someone that you also have the knowledge to ask these questions of the person you're hiring.
If this is not the type of level of support they can provide, but it's something you're looking, you may not be a good fit.
So it's important to know that there is variety in the industry and the type of expertise different accountants provide.
And this is something, again, we've worked in corporate accounting very well lines with how small businesses operate and grow.
And so this is our area of expertise.
We can lean in and kind of help our clients here.
And this is the area that I enjoy educating my clients on and providing them the financial literacy around this.
Even if they're not doing it directly, they're knowledgeable in all these areas.
So I like to make sure that I'm not just doing this on my own, that my clients are growing and learning with me.
Yes.
Oh, absolutely.
I think that's an excellent point and something that we haven't really talked about too deeply.
But I think that a big thing that we just consider at a minimum are just those base things that may seem straightforward to us, but we realize that it's not an intuitive process for most business owners.
You know, this isn't, financial reporting isn't the reason why you got into business.
But that being said, it is something that's so crucial to have done right.
And so, no matter who you hire to do this for you, we really want to make sure that you're getting what you're paying for.
And if you're paying for accurate books and books that are integrity and matching what your business's story actually is, then that's what we want to deliver for you.
So, definitely, definitely agree with that.
Another tricky statement is the cash flow statement.
So, that's the statement where you have your, it produces essentially what your cash activities are of the business.
So, that includes operating activities, investing activities, and financing activities.
And just saying, okay, where is my money going?
Where is my actual cash going?
So, what is your, I guess, from the cash flow statement, is this something that you prepare for clients on a monthly basis?
On a quarterly, like, how do you usually work with the statement?
Yeah, usually, I include it with my financial statement package, but it's not referenced as much, but it does give good insight into where is money going and coming from.
The operating section is the main area where your company's business money generation comes from.
So, this is the main area, kind of the focus, but there's other areas like investing and financing that can also have money movement depending on investing side, if business is buying any equipment, there may be transactions that live here.
Those are more on, I would say, like, the strategy side of things.
So, you're spending money on a strategic basis to yield results down the road for your operating side.
And then the financing is really if you have extra funds and you're investing them in some sort of, say, even index or growing your money, this could be one way or if you've invested in another company.
This generally is more for bigger companies, I would say.
More small businesses don't have so much financing activities unless they have some sort of other setup pre-existing.
But what I try to look at is where is the money going and is there enough to cover future expenses?
Is there enough funds for the next month, next period of time if there's liabilities that are coming to you?
Is there going to be enough cash flow out of this to be able to help the business cover that?
Yeah, oh, absolutely.
And I think that that really is the hugest aspect of what the cash flow statement ultimately is helpful for, for small businesses is seeing just an overview.
Here's where my cash is going.
But then ultimately, is this, you can build trends off of it based on historical data, but ultimately it's, can I pay my bills this month?
Will I be able to pay them next month?
Can I pay them a year from now based on my current activities?
So this definitely does kind of lead also into, it's one of those statements that can help be a baseline for the advisory or the CFO services that we both provide.
But ultimately, it is supposed to just be able to tell you, here's what the actual cash in the bank account is doing and what I can use it for.
So I love this statement, but it is definitely one statement that I try not to dive too deeply into because I get really excited about it.
And sometimes clients are like, okay, just give me the summary version of what's happening here.
I think in terms of order of the types of statements, the P&L probably gets used the most, right?
Most business owners are most familiar with it, and then the balance sheet and then cash flow, but each are really insightful and they relate to one another.
So that's where that story comes together.
You need to see all three to be able to see what's going on with the business.
Yes.
Just to dive quickly into trends, a lot of what the profit and loss can do is help prepare, like just help compare year over year, month over month, just seeing, okay, are there trends that are associated with seasonality or certain services?
So that's definitely an area where with revenue, if you have some slow season, say you're an in-person retailer and you have just certain seasons that see more traffic, foot traffic than others, then this can be really insightful for just planning, okay, here's where I'm going to invest the most in buying more inventory or hiring more people based on the seasonality and the revenue trends there.
So that's definitely a huge aspect of the profit and losses, assessing your revenue trends.
But then with expenses, so I know that I typically will assess, okay, broken down by category, maybe just organizing in ways that makes sense for viewing as a business owner.
So yeah, how do you usually approach the expenses and reviewing?
Yeah, so for expenses, I'm really looking for, again, trends, looking for that year over year, month over month analysis.
I do like to put them in category, so allowing business owners to see what are the highest category spend.
If it is a category that's being overspend, what is, for instance, if there is ads being run, what's the ROI on that?
It doesn't make sense in terms of business growth, or can we scale back on that?
And this falls more into the CFO advisory services, but it kind of segues into it.
So depending on the type of service you're looking for, the fractional side will definitely dig deeper into this.
High-spend areas, I will flag this for my clients.
If there are certain categories that are incredibly high, I will flag it and ask them to dig in and look at, okay, maybe it's software.
This is the high-spend on your software.
These are all your reoccurring subscriptions.
Are you using all of them?
Or do some of these need to be canceled?
And so this is where you can kind of look in at trends on expense side too.
And what I like to do is use percentages rather than concrete numbers.
Percentage will give you a better comparison over time and in relation to revenue as well.
So I will use percentages so it's a little bit more relatable.
And then margins and ratios also come in to play.
Definitely the percentages help assess everything there.
So it's such a, I think, more digestible format of viewing what actually the numbers are saying, because oftentimes if there's just a jumble of numbers and there's commas, then you might not.
It just can get a little overwhelming with what this actually means.
But margins and ratios, like the ones like gross margin, cost of goods sold, just burn rate, and then just also being able to assess anything that's specific to the company, like if they have inventory or anything, it can really help generalize what this percentage means.
And so then you can, like you said, compare it to industry averages or past months and periods.
Yep.
And then the next piece is really budgets versus actuals.
And again, this falls more on the advisory side, but if you have a budget in place, you want to compare what your actual was for that month, for that quarter, and see you in alignment, or do you need to adjust?
Is your revenue way off?
And if so, one, ask why, dig in, right?
Is there a seasonal trend like you mentioned, or is there economic trends like tariffs kicking in, or is there economic slowdown?
And this is where you can actually look and then adjust your forecast going into the future and hopefully align your actuals in the coming months that will fall in line with what your new forecast is.
So that's a good check in the end, and part of our advisory services that this falls into.
Yeah, absolutely.
And we'll definitely further dive into advisory, more advisory topics, because it's hard for us to not get excited about what all this means, but it definitely is an area where it's forward-looking, and just for the purposes of this episode, we want to make sure that you are understanding what the pieces are to understand of your financial statements, so that then you can either do your own research, or you can decide if you want to hire someone, whether that's us or somebody else that you trust.
In terms of helping our clients, Leah, I think for myself, I set up monthly meetings where for my clients, I like to present them with their financial statements and just walk them through, this is what it looks like and these are some of the highlights and lowlights, nothing too deep is needed here if you're not having the financial services add on, but it at least gives you a good insight of this is how the business is performing, this is what I'm seeing as a accounting professional, and this is what I think you could be working on.
And so I like to do that for my clients, point out any red flags, any trends that are there.
And then if they are open to, like if they're going down the path of planning and advisory, that is also open, like discussion at that point too.
But what do you like to do with your clients on your basis?
Yeah, no, that is very similar to what mine are.
Definitely just reviews of red flags and trends is what my reporting package is, along with just giving them the profit and loss balance sheet and cash flow statement, as well as AP and AR aging, which we didn't touch on today, but we can cover in a future episode.
But along with that, like I said, adding just red flags and trends into the notes and just making sure that I cover it.
But also, I've just implemented this actually.
So all of my current clients are grandfathered in and we'll have a monthly meeting set up for them each month.
But actually, my next kind of round of clients, getting a monthly meeting is only for my second tiered package.
And so, in order to get that time to sit down with me and review everything, that's something that they now have to just invest a little bit more in.
So that's kind of a new something that I've implemented.
But I definitely, it's fun, but I don't definitely want to make sure just if they don't have that monthly meeting, that they're still getting the information in front of them, but just a little bit less time on my end.
So that's definitely just a nuance with what my packages look like now with just understanding everything.
That's amazing.
Yeah.
So everyone, thank you so much for listening to this podcast of just reporting, financial reporting, understanding your numbers.
And once again, just we're making sure that you know what's happening with your profit and loss, balance sheet, and cash flow statement, what it all means, the trends that you should be looking for, and also what your bookkeeper, accountant, or financial professional should be helping you with and reviewing with you.
So thank you so, so much for listening, and we will see you next time.
See you next time.
You've been listening to The Accounting Edit, a podcast by Aminder Man of SequoiaCPA and Leah McCool of Orca Accounting.
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Does your business need help on the accounting side of things?
We would love to help you.
You can find Aminder at sequoiacpa.com or on Instagram at SequoiaCPA.
You can find me, Leah, at orcaaccounting.com or on Instagram at OrcaAccounting.
We'll be posting new episodes every other week, so be sure to follow so you don't miss out.

Summary

In this episode, Aminder and Leah delve into the intricacies of financial statements, focusing on the balance sheet, profit and loss statement, and cash flow statement. They discuss the importance of understanding these documents for business owners, identifying red flags, and the role of advisory services in helping clients navigate their financial landscape. The conversation emphasizes the need for financial literacy and the significance of regular reviews to ensure accurate financial reporting.

Takeaways