Understanding your financial statements
Successful entrepreneurs and business owners all have one thing in common. They understand their business figures. Too often we meet with business owners who have never truly understood what their figures mean. Sure, we can look at the bottom line on the Profit & Loss to ascertain whether the business has performed “well”, but what does “well” really mean?
Here are a few tips to think about next time you are looking at your financial statements:
Profit & Loss:
1. Review this year vs last year.
Has income increased or decreased? Has wages expense increased? Was this due to a payout of entitlements or increased workload? Are your insurance premiums increasing rapidly? Maybe it is worth having your policy reviewed and obtaining quotes from different brokers.
2. Do some quick calculations.
If you use an online accounting system such as Xero you can easily obtain more valuable figures from your financial data. If not, you may need to pull out the calculator and do some quick calculations.
What is your gross profit (GP) margin? GP Margin = (Revenue – Cost of Goods Sold) / Revenue. Is your gross profit margin what you expect? How can you improve this?
Look at the monthly comparison figures. Which months were your most profitable? How can you increase profit in the slower months?
3. Compare to budget.
View your profit and loss against your budgeted figures. Again, this can be done with the click of a button in most accounting packages such as Xero and MYOB. This can be such a powerful report to look at on a monthly or quarterly basis. Income and expenses that you budgeted for but didn’t occur can be quickly highlighted and investigated. Large variances can also be identified easily. Consider if there are any explanations for the variances in your figures compared to budget. Some examples include:
- Wages costs higher due to 5 pay weeks in the month (compared to budgeted 4 weeks)
- Travel expenses not budgeted for but important industry conference occurred that you attended.
- Rent doubled compared to budget due to data input error causing the rent invoice to be entered twice.
- Interest expense higher than expected due to new equipment purchase.
1. Review this year vs last year
The balance sheet is often overlooked because of a lack of understanding. The figures shown here can provide valuable insight into the profitability and value of your business.
Did plant and equipment increase or decrease significantly due to purchase or sale of equipment?
2. Look at Receivables and Payables balances
What is your Accounts Receivable balance? Did you realise that this is the amount owed to you by your customers? Is there a way of collecting this quicker?
Can you settle all accounts payable within your suppliers’ terms?
3. Consider Total Assets vs Total Liabilities.
This is what we call Net Assets and it is what reflects the book value of the business. Is this figure positive or negative? What should it be?
By asking yourself these few questions next time you receive financial statements from your accountant or are looking at your business figures weekly or monthly, you should be able to find one or more areas that you can make changes to within your business to improve overall performance.
If you would like assistance understanding, interpreting and ‘using’ your financial statements to better your business please contact our office via email firstname.lastname@example.org or phone 07 4151 8898.
The Money Edge | Bundaberg