How can financial statements be used to make decisions?
Financial statements help you make smarter business decisions. In your business transactions, you will basically have three types of cashflow activities: financing, investing, and operating. A statement of cashflows shows all three together and helps you make balanced decisions and grow your business.
Let’s take a look at each of those three types of activities, then we’ll talk about balance and making smart decisions overall.
Financing decisions
Financing is a huge part of real estate investing that helps you grow your business in a shorter amount of time. If you want to buy 100 properties this month, you’re going to need to borrow some money. A financial statement will help you know how much funding you have and how much you need. And in the hands of a good bookkeeper, you can see in-depth monthly reports on how well your tactics are working.
Investing decisions
The second type of cashflow activity is investing. As a real estate professional, investing is what you are doing all the time to grow and make money. Buying and flipping houses or renting can technically be called investing because you are pouring cash into an asset to try to increase its value. Having these bits of info saved in a financial statement helps you track where you are spending too much or not enough in order to keep yourself from losing money.
Not renting a property that was meant to be rented is an example of losing money. Keeping tabs on how long a property has been vacant encourages you to find a better solution to what is happening. You can also learn what to do better next time.
Operating decisions
Operating activities are everything else you are doing: selling something, collecting rent, paying utilities, paying for your website. It’s not really investing, it’s just working.
There’s a sweet spot where a real estate professional’s operating activities are self sufficient and financing more than covers what is needed to invest. This means that you may have a certain amount of money coming in each month and that amount may be more than your monthly operating expenses. This is great. It means you have a surplus. That is if you don’t keep buying houses. As many real estate investors say, “You always make money when you buy.”
If you are hoping that your operating activities are going to carry you through later, you are buying a bad deal now. So you need to make sure everything is balanced in your favor by measuring them through financial statements.
Finding balance
The point is, if you want to make smart decisions, you have to know what is happening in each of the three categories. If you know that you have $80k in financing and you want to buy a $100k house, you will then know you need $20k plus “oops” money without relying on operating money. Being able to see this in a financial statement communicates that you will either need to find another $30-40k in financing or bring down your investing to match what is available.
Not all of financing and investing is purchasing. A lot of it can also be paying down principal on a loan or lending money and having the lender pay back principal to you. You can use statements to report on whatever you want to report on. While you’re at it, create a bucket for small expenses that don’t have anything to do with properties, but will help you see where you are overspending. Real estate is such a long game that you always want to be making sure your operating funds are increasing instead of being thrown away.
If you have somebody who knows what they are doing making your statements, you can really get down into the minutia of finances. Many people try to get into this, but it eventually becomes too much work to run a business and keep track of a complicated financial statement. If a bookkeeper is able to tell you if something is working or not, you don’t need to get lost in the intricacies. It especially helps that Lionshare knows the real estate industry.
Making smart decisions
Financial statements separate things you care about from what you don’t care about, help you focus on cash flow activities, and balance financing and investing activities. Operating costs should just be enough to pay expenses, recurring investing, financing, and paying yourself.
A well-organized financial statement will let you review purchases to make sure your analysis was correct. Or it will show your current activities are not sustainable. If this sounds like what you have been looking for, it may be time to pull in a professional bookkeeper.