You might have to read your business financials differently at year-end this year. Many of my clients experienced a ‘gap’ in work and revenue during the pandemic’s initial months. Firms in the interior design industry had to delay scheduled installations, which affected project deadlines and revenue recognition. Many interior design firms are also experiencing delays in vendor production. Furniture that would typically take 4-6 weeks to manufacture is now taking 12-14 weeks. Combining these two factors with general concerns about cash spending has created a 3-5 month ‘gap’ that has pushed deliverables to 2021. Two of my clients, for example, have seen 40% of their 2020 revenue push into 2021.
The good news is the business is still there. The bad news is we need to be more cautious when reading our financial statements as a direct comparison can be misleading. Comparing 2020 to 2019 and 2018 without identifying a ‘gap’ in your business performance will lead you to a wrong conclusion, which could ultimately lead you to make faulty business decisions based on raw data alone.
Be careful when comparing your 2020 financials to previous years, as a first glance may be deceiving. I encourage my clients to run year-on-year comparisons a couple of different ways before arriving at a definitive conclusion. For example, I advise looking at a rolling twelve-month comparison that extends forward into your 1Q forecast. I would also attempt to identify any 1Q21 revenue (and expense) that would have traditionally fallen in 2020 and add that to a 2020 comparison analysis.
Your numbers are what they are, but the story they tell you also need to consider any exceptional circumstances. I have had this conversation with several of my clients, and we needed to analyze 1Q21 to get a better sense of their 2020 performance. The analysis changed our story from an ‘oh s*it; I need to cut expenses dramatically’ to ‘oh good; we are still healthy and on track.’
This is especially true if you are running your books on a cash basis, as you have recognized your expenses as they occur, but your billing milestone and cash receipt will be next year. Running your financials on an accrual basis? You’ll need to be careful to properly match up your expenses and revenues to accurately read the results.
Please feel free to reach out to me if you want to talk through your 2020 financial performance.
