Your business financial statements are a management tool!
Many businesses, who have calendar year-ends, are currently working through the process of having their financial statements prepared, either themselves or by their external accountants.
For many, the sole purpose of this process in their view is for tax reporting and filing, and little, if any, attention is paid to them beyond that.
Similar to going to the doctor for a health check-up, this process provides an opportunity to do a check-up on the business. (In the case of your business, annually, is a minimum, and monthly or quarterly is preferable)
The majority of business owners will generally go firstly to their Income and Expense statement, to see how much profit has been generated. (Yes, some will see losses) This provides an important opportunity to check things such as the trend in Sales, are they increasing or decreasing and by what% and why. How does this compare to the market that the business is competing in? The owner should also be checking “Cost of Goods Sold” to see how this is trending and what is the impact on Gross Margin. If costs are increasing, can these be passed on to customers? Are there alternative suppliers? Is there room for negotiation on pricing, or payment terms? Is the business in line with industry norms for this type of operation?
This is the time to review individual expense lines, with a similar thought process, looking at trends, relationship to overall costs, industry norms, etc.
An often under used portion of the financial statement, is the Balance Sheet. Take a look at Inventory levels. Are they creeping up in relation to sales? How many ‘turns’ are being achieved? Is there obsolescence (products that are seldom, if ever, sold)?
Turn to Accounts Receivable. What is the relationship to sales? What is the average term outstanding? How does this relate to your sales terms? (are you effectively being asked to act as banker for your customers) Can they all be collected, or are there some that need to be “written off” or turned over to a collection agency?
Similarly, Accounts Payable position needs to be reviewed in terms of its’ relationship to sales, and to inventories. What is the trend in this account? Does the average term fall in line with the terms provided by your suppliers? Is there an opportunity to obtain better terms?
You also need to be conversant with the leverage (debt to equity) position of the business. What is the trend? How do you compare to industry? Are you compliant with the terms of your credit facilities?
The ability to see what is happening in the business, and its’ impacts, is very important to developing plans for improvement and growth, as well as to effectively deal with various business partners, such as investors, lenders, etc.
Don’t just put this important document on the shelf. Spend time becoming familiar with it, and studying it.
If you’re not sure about how to analyze it, contact your local CFDC or your accountant for guidance and assistance.