I’ll be honest. I tend to avoid things that are unfamiliar.

There is a small part of my brain wearing a yellow hard hat and orange vest, blowing into a whistle, and furiously waiving warning flags anytime I do something new. He has the best of intentions - that little guy has been responsible for avoiding embarrassing moments since the first day of school.

But while he does a great job at mitigating situations where 8 year olds will laugh and point at me, he’s a bit of a saboteur to my company.

And I’m going to guess that a lot of you have that little hall monitor in your brain too.

The reason many founders don’t track their finances ISN’T because they don’t think it’s important, or it isn’t a priority.

They don’t know how. They don’t know what to do.

Staring at financials makes them feel dumb, like they’re not a “real” business person. It doesn’t make sense and is unfamiliar. So they avoid it.

But here’s the thing. That dude is easy to quiet down. You just have to show them around for a bit, get the familiar with things, run a few reps and pretty soon they are proudly leading the charge each day.

So let’s walk you through some basics to get you familiar, to get you confident.

Here’s how we read a P&L statement.

Bookmark this. Send it to friends. Set time on the calendar each month to run through this. Do this and you’ll look and feel like a pro.

Step 1: Organization

First thing, you need to get your books organized. Your P&L won’t make any sense, to you or even the most seasoned analyst, if your books aren’t organized.

By far, the most common source of confusion (and as a result mistrust) is keeping books on a cash basis. Short explanation: revenue & expenses are recorded when they hit your bank account. As a result you see HUGE swings month to month based on when you got paid and when you paid people that doesn’t correspond to work or what is “earned”.

You need to record things as they’re earned (accrual). This puts the revenue earned in a month in that month regardless of when the customer paid. It puts expenses in the month where the revenue was earned.

The result: month by month financials that actually show a picture of how the business is operating. Not just when payment cleared.

When everything is one big “income” blob it’s going to be hard to tell what happened and as a result things start to feel by chance rather than driven by action.

Instead, track revenue by category:

Whatever makes sense to you. But you need to be making product decisions with more clarity than the Income blob.

The standard chart of accounts creates a list of expenses. And most founders when they set up their accounting do so with the lens of “what is this expense”?

A meal, software, contractors, etc.

Which isn’t wrong. But it’s only helpful in looking at how you spent money like a shopping list when what we WANT is to know how much we’re spending on business functions - acquiring customers, serving customers, administrative overhead, etc.

Are those meals for prospective client dinners or team meetings? Are those contractors delivering services to your clients or managing social media? Your decisions, and thus actions, aren’t around how much you spend on software. It’s around how much you spend to acquire clients, deliver services, or manage administrative tasks. So group things like that.

I suggest 3 broad categories with individual sub-accounts underneath:

You might be at the point where you have different team with revenue and costs associated with them and want to see sub-P&L’s inside the business. Use classes to do this.

Think: Strategy team vs Design vs Developers with revenue from each section of an SOW attributed to the team and team labor costs carved out. Things like that.

Step 2: Create context

You spent $2000 on software. Is that a lot? Is it too little? That number by itself means nothing. To read financials is to understand the CONTEXT and CHANGE between numbers.

Is it more or less than before, more or less than budget, and is the more or less appropriate?

Here are the most common, and I’d suggest most productive, comparisons to make:

This month needs some context for how it stacks up against previous months. Do this for Revenue and Expense line items to see what is changing over time and against expectations.

Your business isn’t static, it’s (hopefully) growing. Increasing your spend in labor 50% sounds bad… unless you needed that labor to deliver on a 200% increase in revenue. So we need to think in terms of revenue.

Some numbers are going to be very specific to you and your business. Think about the 2-3 things that you HAVE to nail in order to run a successful business.

For example, an accounting company has clients that pay for services delivered by people. So it is absolutely CRITICAL that our labor cost is tightly managed to revenue.

Some metrics might be:

You may have to add in some numbers that don’t come from the financials (employee count for example) but the point is to give the financials context so you can see if labor is going up proportionally to revenue or not. Or if software costs per employee are going up but revenue per employee isn’t. That sort of thing.

Step 3: Tell a story

A simple trick to helping yourself learn this is to explain it to a friend or peer. Create a fictional board you need to report to or an AI “Partner” who asks you questions.

Once things are organized and you have some context put together a story. Here’s a financial statement Mad Libs for you:

This month Revenue was up/down by $_________ and ____%. That was primarily due to more/fewer customers and higher/lower spend per customer.

More/less customers was driven by _____ (seasonality, fewer leads, holidays, lower conversion), while higher/lower spend per customer was a result of _______(__ change in rates/prices, more active projects per client, more items per cart, larger engagements/companies)

Cost of Goods as a % of revenue was ____% and above/below our target of ____%. This was primarily from _____(increased use of contractors, higher shipping costs, lower volume relative to our fixed software costs…)

Sales and Marketing as a % of revenue was ____% and above/below our target of ___%. This was a result of spending more/less on (channel, commissions, events).

Overhead as a % of revenue was ____% and above/below our target of ___%. This was due to _______ (increased revenue while holding costs stead, cuts to ___, new software, recruiting costs…)

Overall our growth was strong/weak this month, ____ over the last quarter, and _____ year to date put us on/off track from our targets.

Expenses have grown/held/declined relative to that growth/drop in business leading to strong/weak profitability and an overall margin of ___%.

Over the next 30 to 90 days the plan is to focus on (metric of concern/opportunity from above) and address with the following actions:

That might sounds like a lot but just start one step at a time.

Go in order. Clean it up. Create some context. Tell a story.

Hopefully that takes down the anxiety a little bit for you and given a few reps you’ll be feeling confident.

If you’d like us to help you get through the first one and set you up to do this going forward, book our team for a 6-week Financial Sprint where we’ll do all this for you and teach you how you can stay on top of it going forward.

Keep up the good work and keep it cash flowin’.

Best,

Chase “Mad Lib-alytics” Spenst