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Why You Need to Review Your Financial Statements on a Regular Basis

Published: 18/09/2019
By: Brandon

A few weeks ago, I joined Barry Moltz and Chinwe Onyeagoro (CEO of PocketSuite) on their Professional On-The-Go podcast

to talk about the business of real estate photography. We had a great conversation and during my time with Barry, I got a glimpse of the wealth of knowledge he has when it comes to starting, managing, and growing a small business. We talk a lot about gear and photo technique on PFRE but we don't spend enough time discussing the business of real estate photography so I approached Barry to see if he would be willing to chime in once in a while and share some thoughts on how we as real estate photographers can keep our businesses on track. He was kind enough to oblige, and today he is talking about the importance of reviewing your financial statements.

Author: Barry Moltz

Get over your fear of the numbers. You may think you know your finances in your head; you don’t. You can never formulate a strategy to grow your company if you don’t know the past financial results. It’s essential every small business owner knows how to read a financial statement. Here is where to start:

Profit and loss statement: Shows the revenue, expenses, and profit of a business over a period of time. The basic components include:

  • Revenue: This is a business’s sales, resulting from customers buying your products or services.
  • Cost of goods or services (COGS): This is defined as the direct cost of producing the product or service the business sells and could be raw materials or labor.
  • Gross profit: The difference between sales and cost of goods. Also known as gross margin.
  • General expenses: Rent, people, insurance, utilities, telephone, travel, etc.
  • Net profit: This is the difference between gross profit and general expenses. Taxes and depreciation are typically deducted from net profit.

Balance sheet: Learn to read one. This is the book value of your business at any given point in time. It also measures the ability of a company to pay its debts. Following are the basic components:

  • Assets: What the company owns. This can include:
    • Cash: How much money the company has in the bank
    • Accounts receivable: The value and age of the money that is owed to the business
    • Inventory: The value of the inventory
    • Fixed assets: Equipment, computers, and property
  • Liabilities: What the company owes. This can include:
    • Accounts payable: The money the business owes vendors
    • Loans: The money the company owes banks and other sources
  • Owners’ Equity: The assets minus the liabilities. This can include:
    • Stock: Paid-in capital
    • Retained earnings: Profit retained in the company since the start

There are many good resources available to learn how to read financial statements. Get help from your CPA or educate yourself online. Remember, accountants are advisors, not adversaries. Review your financial statements on a monthly basis. Performing this task will help you gauge the health of your business. Here are three other measurements that help you find important information about your business:

1—The quick ratio (or the acid test) on the balance sheet: This is the business’s current amount of assets (cash, cash equivalents, accounts receivables) divided by current liabilities. A favored metric of banks, the quick ratio is a measure of the financial stability of a business. In most industries, the quick ratio should be greater than 1. It shows the company has more cash available than current money it owes. When the ratio goes below 1, it means your business may not be able to meet its financial commitments.

2—The business’s sales-close ratio in your customer relationship management system (CRM): Of all the proposals your business sends, how many do you win? This is a key number since it should not be too low or too high. If it is too high, either your business is not talking to enough prospects or your prices are too low. If it is too low, you may not be qualifying your prospects enough before preparing proposals for them.

3—Your 10 most important customers: This is not just measured by revenue, but also by referrals, additional products they buy, feedback they give, retention, or their superior power.

As a small business expert with decades of entrepreneurial experience in his own business ventures as well as consulting countless other entrepreneurs, Barry Moltz has discovered the formula to get stuck business owners unstuck and marching forward. Barry applies simple, strategic steps to facilitate change.

3 comments on “Why You Need to Review Your Financial Statements on a Regular Basis”

  1. Good advice here, to help put this perspective for other RE photographers, here's a little snapshot at what I do.

    I keep a running excel spreadsheet with several columns, the most important ones are:

    Listing address, client name, town (I live in an area with several small cities and cover about a 1.5 hour radius), date of photo shoot, amount charged to client, CC fee (if applicable), and an area for notes. This isn't my entire spreadsheet but it's the meat of it.

    On a separate sheet I keep track of anything I purchase for the business (batteries, shoe covers, gear, small item replacements, etc.)

    At least once a week I go back through my calendar and update my spreadsheet, keeping track of every photo shoot. I also highlight shoots certain colors as they are paid, unpaid, or past due.

    From here, thanks to the wonderful functions of excel, I can easily see how much I'm making, how much I'm spending, what clients are spending the most, what communities/cities are I'm getting more business in, month vs month comparisons, and all sorts of helpful info.

    At the end of the year I enjoy analyzing the data to see what communities brought more business, highest grossing clients, what clients spent the most per shoot, and all sorts of stuff. I challenge myself to think of metrics to gauge the business, how/where improvements can be made, and so on.

    It's a little tedious, but well worth the effort.

  2. For me, its about one number, CPS (cost per shoot).

    Take my car. I pay 28k for a Honda Civic, and it will last 4 years with a residual value of about 10k. So it costs me 18k over 4 years, or 4500 a year. It also costs me about 3k each year in gas, oil, tires, and carwashes, for a total of about 7500 a year.

    So, if I shoot 1100 houses in a year, that's just under 7 bucks a shoot. If my prices start at 125 per house, I obviously can live with $7 for the car.

    I break everything down like that, and here is where it gets interesting. A $2000 camera, every 2 years, costs me less than a dollar a shoot. A 15 dollar lunch on a 5 shoot day costs me $3 a shoot. But, even though I beat myself up about being able to afford a new camera, I go out to lunch every day with no hesitation at all. But the truth is, 3 new cameras every 2 years is still less than what I spend on restaurants.

    When I see these numbers in context, it causes me to stay in a car that gets good gas mileage, buy cameras without guilt when I need them, and eat at home if I am shooting within a few miles of the house.

    My CPS when I started was about $22, now its about $29. As a percentage of income, I realize that it's time for raise my prices, which I am doing in January.

    I also do a full balance sheet and income statement at the end of every year.

  3. Knowing where you are financially with your business is very important and being able to analyze a P&L and Balance Sheet is crucial to letting you know how you may be trending. An accounting program that keeps track of that and also has a feature for creating and comparing budgets with actuals is a useful tool. Not something you can do with a simple invoicing program or keeping track of accounting on a spreadsheet. If it's not easy to analyze your accounting, you won't do it.

    The "acid-test" on a balance sheet as described is frequently not applicable. If you have taken out a line of credit or loan to purchase gear, you can have a ratio under 1. If you are needing to preserve cash on hand, it can make sense to finance when you have the cash on hand, but I would be buying gear outright most of the time if I had the money rather than financing it. I don't see the point in paying somebody interest when I don't need to.

    For the independent RE photographer, most gear is going to be expensed in the year it's purchased for tax purposes. Fixed/capital assets are often taxed by localities as 'business personal property' if they are depreciated over time. I also don't have inventory. Supplies I use on the job such as tape and blue tack are expensed as consumables. There would be no point in trying to allocated them as they are used on jobs. The same goes for door stops that I often leave behind and have to replace. I'm not as bad now that they have their own cubby in my case and I can see an empty hole if I haven't picked all of them up.

    There is a concept I learned in the aerospace world we called "analysis paralysis". You could spend so much time analyzing some piece of engineering that you never get around to making one and testing it in the physical world. The same thing goes with CRM. If your business is very straightforward, spending much time on CRM is useless. Specifically for RE, I am not sending out proposals so there is no tracking involved. I provide a limited number of services and customers are only ordering a few things from me. Mostly that's home photos, a subset will want drone images, twilights and fliers. Not all of those addons will be wanted on every job. A customer's acquisition of listing contracts is going to vary substantially so tracking averages is misleading. Tracking the jobs ordered from a whole office might be informative but even that's quite variable if the office isn't very big or the market is depressed/active.

    I'm not sure how I'd go about tracking referrals, retention and feedback. I do pay a commission for referrals so it shows up as a line item in my accounting and I can generate reports on that. Some customers give me feedback and some don't. I do my best either way. My retention has been very good. Nearly all of the agents I don't do work for anymore have retired or moved out of town. Only a couple had issues with my service and in most of those cases, I wasn't unhappy to see them go. A couple of agents it was my choice to no longer accept work from.

    The biggest thing I do with my accounting and budgeting data is make sure my pricing stays in line with my costs. Creeping gas prices being a sneaky way to lose money. The same is true for traffic increases that add more time to each job. I have a spreadsheet I use that is fed certain data exported from my accounting program to asses my baseline business costs and incremental costs to do each job. I run those 2-3 times a year.

    Randy has posted some great examples. I used to be able to deduct as least 20% of my lunches since most jobs are 50 miles away when I do eat out but that's been taken away. It means that those numbers aren't going into the accounting program and are harder to track. Part of the solution is to pack lunch far more often, but I do like to treat myself from time to time. My car is accounted for outside of the business and I deduct mileage I put on for business uses. I still need a car, so I can't apply its total cost to the photo business. I'm glad I don't have a coffee addiction. Banks love to charge for everything these days. If they do, you have to apply the charges to each job if you are assed a fee for depositing a check or processing a debit/credit card. 3% on a $200 job is $6. Not a huge amount, but everybody has a hand out for another $5 and it adds up.

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