Managing
with your Financial Statements
Using your monthly financial statements to make profitable decisions
It is very common for business owners, upon receiving the latest copy
of their financial sheet, to make comments to the effect of, "I
see payroll expenses are down", or "sales are down slightly
but we made more money." These are comments of surprise in response
to changes, which hopefully do not drastically affect the existence
of your business. These comments, however, are the first of a four-point
concern that you should have about your financial sheet and the information
it contains. The second concern is in regards to the timeliness in
which you receive or create your monthly financial sheets, the third
concern is your ability or decision to make a change, and the fourth
is your knowledge of what the financial sheets contain.
Let's take a quick look at each, and see how your business stacks
up. Comments of surprise are to be expected, as long as they are within
certain boundaries. If you have been in business for several years,
you should be able to anticipate your financial statement for any
month by examining your statements from previous months and calculating
the changes that may occur.
If sales for July of this year are more than July of last year, you
should be able to anticipate your cost of sales, and with an estimate
of your variable expenses, accurately calculate the bottom line and
your end of the month cash balance. Of course, there are many businesses
that have never felt the need to have this information. But those
that do gather and use this information within their business will
tell you that having this will often assist them in taking profitable
advantages of changes in the market place.
The second concern is to ask how soon after the end of the month have
you received or created your financial sheet. While there is not a
one correct answer for everyone, the business that does not use their
financial sheets to assist in the month to month decision making probably
has little need to have financial sheets promptly. The business that
can look at their July financial sheets, and make minor adjustments
to their business plan for the next 90 days, will definitely want
to be reviewing the financial sheets by the 10th of August.
Can you really use your financial sheets to make your business more
profitable? Let's look at two examples using a business that grosses
$750,000 per year, and has a net income of 3%. If that business could
save only $100 per month in the expenses, that savings will affect
the bottom line as much as increasing sales by $40,000. And if we
were to examine the gross margin from this business, being able to
increase the margin by 3/10 of one percent, will add more to the bottom
line than if we could create a 13th month.
With examples like this, not only is timeliness important, but also
the ability and decision to make adjustments can drastically change
the profitability of your business. This leads us into the fourth
concern; knowing what is contained within the financial sheets. You
may not have a degree in accounting, but you should know about your
financial sheets. If for no other reason than to save that hypothetical
$100 we were just looking for.
Your expanding your ability to understand and work with your financial
sheets can reduce the fees of an accountant. Most accountants would
feel better knowing that their client was actually using the financial
sheet to manage the business, as compared to only being concerned
about the tax preparation at year-end.
To gain this knowledge you can find many choices in a bookstore, as
well as columns such as this in many trade magazines. There may even
be an accounting class available through a community college or the
Small Business Administration.
As you are reading, you will need to know the difference in cash basis
accounting or accrual basis accounting. And as you gain more knowledge
you may find that you will rearrange your financial sheets to better
give you guidance. And, just like a captain steering a boat you will
not be looking over the rear of the boat, but instead ahead to the
future. You will find that compared to just being historical information,
your financial sheets will now guide you into a more profitable future.
* Creating timely financial statements should be a priority in your
business
* Your financial sheets can guide you to increase your profitability
* You should be constantly striving to expand your accounting knowledge
