Making Financial Statements Work for You with 3 Key Questions

By | May 16, 2022

Every minute of the day in 2020, Google conducted 5.7 million searches, Twitter saw 575,000 tweets, Facebook logged 44 million views and TikTok users watched a whopping 167 million videos, according to research from cloud-based operating system DOMO.

We are literally flooded with information every day of our lives. With the average person processing countless amounts of information, consider how much data a business owner — passionate about taking his business to the next level — is reviewing and processing during and after the workday. With this overwhelming amount of data surrounding them, what should they focus on to ensure a better future for their business?

Not surprisingly, many of the answers can be found in a set of well-documented, accurate and timely financial statements. But to find the solutions your business needs to succeed and grow within those columns of numbers, you have to know what to look for.

I’m going to give you some short, concise and practical tools, in the form of questions, to make those monthly financial statements more meaningful. Answering these questions will transform those financials into a concise compendium of information revealing a road map for agency operations success for the future.

Breaking Down the Financials

First, what should a good agency financial report consist of?

The balance sheet, I believe, is the most important financial statement for an agency owner to read and understand. That’s because the balance sheet tells you whether or not you are solvent. Solvency means survival, which is always the most important thing for any business. This isn’t an article about the technical analysis of your balance sheet, but two questions you should ask of your balance sheet every month include: 1. Are we solvent? 2. Are we likely to remain solvent?

You can determine your solvency by calculating your “quick ratio.” This is simply current assets divided by current liabilities and by the number of days of working capital, which is how much cash you have divided by your daily cash demand. Your balance sheet will tell you if you have the financial resources to execute your business plan and tell you what parts of the business — marketing, people, etc. — you need to invest in to grow at a given rate. If those money demanders are growing, the balance sheet will tell you whether or not you have the money you need or if you need to make adjustments in operations.

Like a bookend, a profit and loss statement tells you where your money has come from and where it has gone. It tells you how many sales you’ve made and how you’re spending your money. Salespeople love to focus on the top of the income statement where revenue is listed because it shows how much money your business is creating, how many sales you’re making and how the top line is growing. But I like to read the P&L from the other direction starting with the bottom line. Are you making or losing money and how much? If the answer at the bottom isn’t what you expect, it directs you to focus on the middle of the statement which shows where your money is going

I hate to admit this, but many years ago early in my insurance agency career, we were growing quite rapidly and the partners had decided to distribute a good portion of the profits. One morning, I arrived in the office and our bookkeeper pulled me aside and worriedly told me that if our checks for accounts current were mailed that day, we’d be overdrawn. We’d been focusing on profits within our financial statements, not cash flow.

Cash flow is the blood that powers your business and keeps it alive. Particularly in a growing business, cash flow is the single most important line of a financial statement a business owner should review. It tells you not only if you are creating more cash every month than you’re consuming, but also where you are consuming cash, as well as where the cash is coming from. While many businesspeople never look at this statement, I think it’s imperative to consider it carefully at least monthly, if not weekly, for a growing agency.

The 3 Questions to Find Context In Financials

Too often, these reports are misunderstood, poorly interpreted, undervalued or completely overlooked in many agencies. They are viewed as sterile, boring and not particularly meaningful. To be of value, financial statements need to have context, and the context is what’s happening right now in the business. I find a conversation among agency leadership centered on these reports can be the most productive if the team drives discussion around these questions:

Is this what we expected?

If not, why not?

What are we going to do about it?

These questions allow the numbers in the financial statement to become dynamic, meaningful and the basis for intelligent action. The answers to these questions either serve to instill confidence and reinforce the fact that you’re headed in the right direction or they serve as a call to course correct.

For example, let’s suppose you have a cash target — an amount of money in the bank that you want accessible at a certain point in time for some business purpose. However, this month, you show that you not only don’t have that amount of cash, but the trend in your balance sheet projects you’re not likely to develop it in the time period defined in your business plan.

To question number one — no, that isn’t what you expected.

Why not? Did you invest in something that was not planned for? Was there a bad debt loss on an account? Was accounts receivable higher than it should be and in danger of becoming less collectible? Why do you not have the cash you had planned to have?

This leads to the third question, what are you going to do about it? Are you going to collect accounts receivable? Are you going to resolve to be more disciplined with purchases? Should you delay the hiring of an employee that you planned for in the next quarter?

Knowing that you’re not where you intended to be should trigger a dynamic conversation among leadership about how to pivot in real time to ensure that the business reaches its objectives.

Focus on the Future

Asking these three questions allows agency owners to not only identify the areas of the business that are not going the way they had planned, but to laser focus on improvement in those areas. The exceptions to what we expect are what should trigger us to take immediate action. If we do that, we have a far better chance of coming through the end of the quarter, the year, or the decade on plan.

I used to think that financial statements were dull, dry, boring and not nearly as exciting as the sales report. I see that differently now. Financials that tell me we’re on plan and are going to achieve our goals are exciting. At the same time, these three questions allow me to determine where we are off track and help me to understand what we need to do about it — right now.

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Insurance Journal Magazine May 16, 2022
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