They should be usable, not complicated.
Welcome to the Business Numbers Podcast. I’m your host, Ben McAdam. I’m a profits coach, virtual CFO, and entrepreneur, and I’ve created this podcast to help you grow your business profits and understand your business numbers without judgment and without burying you in a whole bunch of jargon that you don’t need. Just actionable tips and case studies to help you grow your business. For show notes, go to the website www.businessnumberspodcast.com.
In this episode, I would like to talk about how to make your reports simpler.
Something I’ve seen for a couple of clients is that their reports are a bit complicated. Unnecessarily complicated. It could be for a few reasons, like a previous advisor set up complicated reports trying to impress people with complexity. Like, “Oh yes, this guy must know what he’s talking about the reports are very complex”.
Maybe the client read a book and they were impressed, again with the complexity. Or they looked at dashboard software which showed a ton of ratios and numbers and were impressed with that. You note that I keep using the word impress… it’s definitely a thing, and I could do it this way.
If I know all the complicated ratios and tell you why you should pay attention to them, you might think, “Oh, yes! Ben knows what he’s talking about… but I kind of don’t quite understand so maybe I should pay him to help me”. However, the secret is that a real master of their craft can explain it in simple ways.
Back in the old days, [with] the idea of a master and an apprentice. There’s a master, and they have an apprentice, and they teach the apprentice so every master had some teaching experience. Or, for those of you who are into martial arts, you might study under a black belt in karate or jujitsu, but at some point, before you attain your black belt you are asked to teach the beginners. And the reason why is because that helps refine your knowledge, as well as it takes some of the teaching load off the main teacher. That’s handy for them too. But, teaching other people helps you refine your craft better.
So, someone who’s a real master at some point probably taught it to somebody else for a while. And so they’re used to explaining things in simple ways because they’ve learned that explaining things in a complicated way doesn’t help the student learn.
Whereas, sometimes in the advisory space… “complicate to profit”, I think is the phrase that Tim Ferris used to describe the diet industry and the weight loss industry? You add complications, people are impressed, they think that the missing bullet is that oh, this new complication they’ve heard about, that’s the reason why they haven’t been able to lose weight. And it’s a bit the same in the financial numbers area of business, I’ve noticed.
I might be doing myself out of a job here, you might think if I give you more confidence in your ability to understand your numbers. But that’s kind of what I do.
Even if you’ve hired me, I’d try and make sure that you didn’t feel that you needed me in order to understand your numbers. You might want an advisor because either they’re more experienced at reviewing the numbers and have helpful insights from other businesses, or you don’t like looking at reports, or because you like having a second pair of eyes as a backup or security. There’s nothing wrong with that.
Wanting an advisor is something totally different from needing an advisor. If your reports are so complicated that you cannot look at them on your own, what happens if your advisor gets hit by a bus? Is your business gonna fall apart because you don’t have them available to look at the numbers? I hope not.
Let me give you a couple of examples of unnecessary complexity, and then let’s talk through the steps of how to simplify your reports.
So, some examples of unnecessary complexity, at least in six-figure businesses and a lot of seven-figure businesses these are unnecessary.
If you have a service business, then looking at the labor utilization ratio is unnecessary. You possibly don’t know what it means, and that’s fine you don’t need to.
If you have a product business, an example might be inventory turnover ratio. Which again, isn’t relevant if your business is smaller. There are other ways to see whether you’re being efficient with your inventory that are less complicated, less opaque, [and] require less explanation.
The cost of goods sold section on your profit and loss (or income statement) or the contribution margin section, those areas can be unnecessary complexity for a lot of six-figure and low seven-figure businesses.
So, if you’ve got those kinds of things I’m here to tell you, you probably don’t need them!
Make it simpler.
The point of a report for your business is that it’s supposed to help you understand what’s going on in your business, [and] make it obvious that there are any red flags or opportunities that you’re missing. And so you don’t spend a huge amount of time understanding the reports, it should be a very quick way for you to absorb the data. And then you spend your time thinking about what to do next based on what you’ve learned.
That’s the real value in the report. It’s not what’s actually in the report, it’s the thinking afterward that you do with data. Good data, not your gut or your intuition which might be affected by mindset issues.
If you’ve got data to tell you that your revenue is going down overall, even though your favorite product is actually increasing in sales, that tells you “Oh wait, I’m getting too obsessed with this particular product or service, and it’s cannibalizing the attention I should be putting on the other products or services… and overall my revenue is going down because of this fixation.”
That’s the kind of thing that reports should make very obvious to you very quickly because the report is clear and simple to understand. Then you can spend your time thinking about what am I gonna do about it?
So some steps, and some ideas here for you on how to simplify your reports.
- Number one, remember that the purpose of these reports is to help you understand, monitor, and make decisions about your business. And it’s to help YOU is the point.
Your tax accountant might prepare a set of financial statements according to the rules they have to follow. Maybe your business is even big enough where you have to submit financial statements to a government body or regulator, or to a lender, or to investors and that’s fine. That version of the reports helps make their decisions, [and] their standards that have to be followed to prepare those. Great.
But, the reports you use to manage your business can have any kind of layout or whatever inclusions that you want. They can have colors or no colors, graphs or no graphs, tons of numbers or very few numbers. It could just be a dashboard versus pages and pages of reports. Whatever helps you understand what’s going on in the business so that you can make decisions. Make the reports look whatever way you want.
- Number two, the second way to simplify your report. Choose a few ratios or metrics or numbers that matter, then design the reports to show that.
I record an episode in the future on the key numbers in your financial statements. So keep an eye, or an ear, out for that episode if you don’t know where to start or which numbers are the most important.
But, the key here is [to] pick a few that really matter and make sure they’re not lost in a sea of numbers or a thousand-row spreadsheet. Make sure that you can see those numbers, that they jump out at you, and that you understand those in particular.
There really are only a small handful of numbers that matter in a business, or there’s only a couple of metrics that you might wanna look at that might be your focus for the quarter to improve. And so your reports don’t need to be hugely long, convoluted, complex, and overly detailed. So just pick a few.
- So the third idea about simplifying your reports is [to] avoid the “just in case” problem.
Don’t pack in extra ratios or metrics “just in case.” This is something that drives me absolutely bonkers about financial reporting software or financial dashboard software is that it puts in way too many ratios, metrics, numbers, percentages, trends, graphs, charts, [and] whatever.
They pack in a lot of things because people think, “Oh, you know, this is a really valuable piece of software! Yes, I will pay $200 a month for this software instead of $100 a month because it’s got so many more ratios and metrics than this other piece of software” …that basically does the same thing.
It’s a bit of a fallacy that you need a bajillion metrics and ratios, and there is no such thing as “just in case” numbers. There are key numbers, numbers that matter. There are some numbers that you don’t check as frequently or you don’t look [at] in great detail as frequently. But there’s no need for “just in case”.
If you’re not sure which are the right numbers let me know, or listen to some of the other podcast episodes, or read the blog posts on my website www.profitscollective.com. Or just reach out to me and I can tell you the ones that you need, because like I said there really are only a few.
So a quick recap…
- Simplify your reports by remembering that they’re supposed to help you and you can make them look the way you want.
- Number two, choose only a few important ratios, metrics, or numbers.
- And number three, don’t pack in any extras “just in case”.
This isn’t a trip where you have to pack for every single type of weather, you know the weather ahead of time so you can pack less.
I hope that analogy makes sense, I think it’s pretty clear. I have been traveling, I’m currently between conferences. I spoke at one last week or the week before last and I’m going to another one tomorrow, flying off to another one.
One was in Bangkok, Thailand, and the other was in Miami, Florida. And so I’m packing a whole bunch of shorts. Maybe one long pair of pants in case I go somewhere nice, but I know it’s gonna be hot, and I’m gonna be in the hotels a lot anyway, and I know the temperature’s gonna be warm enough for shorts to both of those. I don’t pack in a whole bunch of financial ratios, I mean I don’t pack in tons of long pairs of pants, or snow pants, or anything like that “just in case”. It’s just silly, right? Same thing with your numbers.
Okay. So, why do your reports need someone to explain them? Are they unnecessarily complicated? Well hopefully, this episode has been helpful. Gave you a few ideas about how to make your reports simpler, and why.
As always, if you have any questions happy to answer them on a future episode. Just reach out to me and thank you for listening.
Before you go, two quick things:
- If this was useful, please give it a review and share it with a friend who it might help.
- If you want help from me to unlock growth and profits, and greater clarity around your numbers, book a call through www.profitscollective.com and if we’re not a fit I’ll point you in the right direction.
Thanks again for listening.