Reading simple reports

Reports tell a story in three questions: are you growing, are you profitable, and are you liquid? A profit and loss statement answers the first two. A cash summary answers the third. Read them together or you will draw the wrong conclusion. Compare against something — last month, last year, or your plan. A single month in isolation means almost nothing. A common mistake is reading a single report in isolation and drawing a firm conclusion from it. An owner sees a strong profit and loss statement and assumes everything is fine, without checking the cash summary, only to find bills piling up because customers have not paid yet. Each report answers a different question, and skipping one leaves a blind spot that eventually causes a surprise. To decide what to compare a report against, pick the comparison that matches your goal. If you want to know whether the business is growing, compare against the same month last year to account for seasonal patterns. If you want to know whether you are on track for this year's goals, compare against your plan. Comparing against last month alone can mislead you during a naturally slow or busy season. You know your reports are giving you a true picture when the three questions, growing, profitable, liquid, tell a consistent story that matches what you feel happening in the business day to day. If the reports say one thing and your gut says another, recheck your categories and your cash forecast before trusting either the numbers or the feeling completely, because one of them is likely based on incomplete information. A retail shop owner looked only at monthly revenue and felt confident because it kept climbing during the holidays. Pulling the profit and loss statement alongside the cash summary showed that rising revenue came with rising credit card processing fees and slower supplier payments, eating most of the gain. Reading all three questions together let her negotiate better payment terms before the next season instead of after a cash squeeze.

Key takeaways

• A profit and loss statement answers the first two.
• Compare against something — last month, last year, or your plan.
• Rising volume with flat profit usually means rising direct or overtime costs.

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