Christmas is here, just before the end of the year. Time to gather your information and you’re your taxes. It is also a great time for business owners to take a deep dive into their financial results and make a plan for next year. Your statements can provide clues as to what is working and what isn’t. Here’s a quick guide to discover your story:
The Company’s ability to generate a profit. Pull out that Profit & Loss or Income Statement
- Sales. Did you meet your goal? Did you exceed last year?
- Gross margin will tell you how much of the sale covers overhead. Is it what you were expecting? Improving over last year or trending down? Are you selling the right things?
- Overhead expenses. Are they reasonable? Is it what you expected? More or less than last year?
- Net Income. Is it what you expected? More or less than last year? If not ask why?
Where can you improve?
- Review a month-to-month comparison. Do sales fluctuate? How much do you need to breakeven each month? What can you do to meet breakeven every month?
- Direct costs by product or service. How can you improve the profitability on each type of sale?
- Sales by customer. Review profitability on each customer. How can you improve the profit? Do you need to raise prices? Or fire them?
- Overhead expenses. Review a month-to-month comparison. Are the costs consistent? Are you maximizing the expenses to generate additional sales?
- Staffing costs can make up a large portion of overhead. Now is a great time to review annual wages – pull out those W2’s. Is the company getting full value? Would you rehire each employee?
How financially stable is the company? Let’s take a look at the Balance Sheet.
- Equity section. This is the “Book Value.” The higher the value the more resilient the business is. The less you need to rely on banks and the better your chance to withstand a downturn.
- Calculate Working Capital. This is the excess of the current assets over the current liabilities. Again the higher the better.
- How much cash is available? Are the receivables being collected? Can you improve the customer payment terms?
- How many times during the year will the company sell their entire inventory? The more times the inventory turns the more profit the business can earn.
- How leveraged is the business? What is the debt to equity ratio? The lower it is the greater stake the owners have in the company as compared to creditors or bank.
Now let’s take a look at cash flow. Turn to the statement of cash flows to determine where the cash is coming from and where it is going.
- Business always want cash provided by operations. Did receivables increase? Did inventory go up? How can we improve the situation?
- Did the business invest in new equipment?
- Review new loans taken or old loans repaid.
Every financial statement tells a story. Was this a year to celebrate and feast or a year of losing weight and applying yourself to improvement. By understanding your story, you can rewrite the ending. Use your financial statement as a tool to verify what you think is happening and to use it as a guideline to improve the results. Identify one thing that you can do today to enjoy next year’s feast!
For most small business owners the financial statements are written in another language. Being a small business owner and a CPA we understand that language. Our experience creates a deep insight to the business activities that are behind the numbers. At FOCUS CPA we can provide the financial perspective.
We can improve the accuracy of your statements, redesign your statements so you can use them more efficiently, make observations and recommendations and help you use them to improve. Give us a call at 920-351-4842 to learn more about how we can help.