Finding The Solution to Your Business Success

You have no doubt heard the expression, “Can’t see the forest for the trees”.  I think this saying was conceived specifically for the reading of financial statements.  It is easy to assess whether a company was profitable and has equity by just looking at the  statements.  But what about all the other factors that go to make a company successful?  Read more.

Even the most seasoned analyst, consultant or accountant can tell you very little about a company by just flipping through the financial statements.  When I receive a 5 year package of accountant prepared and in-house statements, I often sit back after flipping through and ask myself.  How am I going to explain this one?

I can see, for example, there are four years of losses and the equity of the company has been eroding, but so what?  Just looking at the bottom line will not answer the question “WHY”!

As business people, you have an acute sense of your company’s success and how the business is performing.  However, the only way you can get to the heart of your company’s performance is by breaking it down into its components.

The financial data contained in your statements tells a story that will lead you to make the right decisions for managing your business.  Some of those components are as follows:

  • Inventory
  • Equity
  • Operating lines of credit
  • Payables
  • Long term debt
  • Sales
  • Cost of goods sold
  • Advertising
  • Salaries
  • Interest expense
  • Overhead
  • Profit/Loss

By breaking this information down over a 5 year term, a picture will begin to develop that will answer all of your questions.  Couple this with industry targets that dictate levels of performance and you have a clear road map of the strengths and weaknesses of your business.

You may think your shrinking profit is the result of low margins, but it could very well be something entirely different or a combination of factors.  Some of the calculations that need to be considered are:

  • Inventory turns
  • Debt to Equity ratio
  • Liquidity
  • Working Capital ratio
  • Return on investment
  • Return on sales
  • Individual expenses as a percentage of sales
  • Gross margins per product group and department
  • Sales volume as a percentage of gross sales
  • Service efficiency
  • Profit percentage

It really is amazing how, after a few hours of working these numbers, a clear picture begins to emerge.  A lot of people wonder how I can get so excited over analyzing financial statements.  It’s the power you feel when you finally know the answers that can potentially put money into the owner’s pocket.

Sometimes it boils down to a little tweak here and there that can make the difference of $50,000 in profit.  Other times the answer can lie in inventory alone.  Too much inventory will reduce turns, which inflates interest expense and puts pressure on margins. 

Whatever the case, doing an analysis will let you see the forest for the trees.  If you need help with your analysis, contact me for a free consultation.

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