Beyond the Business Plan
Analyzing your records is Critical to Decision-Making

Your books and records must be examined on a periodic basis, not just for tax and audit purposes, but also because they contain the data that you need to employ in making sound management decisions in charting your future. 

Why should you care?
Well, perhaps:

• You want to make more money in business
• You want to improve your business management
• You want to sell your business
• You’re thinking about expanding your business
• You're going to need financing
• You want to chart a path to the future
• You want to liquidate some of your unprofitable property. 

Here are the analyses we use to dig out the appropriate decision making information.  It’s not exciting to read about, but knowing about it may save your business life.  It might be a good idea to look at your financial statements as you read on.

The Big Three: Your Financial Statements

Balance Sheet – Provides a basis for examining your resources and how they have been financed as of the last available reporting date. It's a "snapshot" of what you have available to create profits and who you owe for providing the support. 

Why you should care.  The balance sheets provides a bird’s eye view of your current assets (cash, accounts receivable, inventory, and prepayments), and of your current and long-term debts (amounts due creditors and the government). These are the items that you really need to control on a short-term basis. The long-term assets shown on the balance sheet are not shown at their market value. So, the balance sheet doesn't really indicate the value of the company. See valuation.

Income Statement – This statement is a numerical expression of the Revenue accounts less the expense accounts, resulting in net income.  None of the numbers here represent amounts of cash.  Revenue is a recognition of assets (cash or accounts receivable) from sales in the ordinary course of business, Expense is the recognition of assets given up in making those sales.  Net income (also referred to as profit or net profit) is the result of subtracting expenses from revenue.  That’s it. 

Why you should care.  Your long term goal must be to take in more assets (cash and accounts receivable) than you have given up.  The income statement provides this information for each period you measure.  A series of positive net incomes is an indicator of your profit potential. 

Statement of Cash Flows – Often, your net income does not reflect cash flow for a given period.  For example, cash received from sales of equipment or other assets, or from financing is not included in net income.  Neither is repayment of debt or purchases of equipment.  The statement of cash flows provides you with a more complete picture of business activity that does the income statement. 

Why you should care.  It is important to understand the origins of you cash inflows and the purposes of your cash outflows so you can differentiate your cash flow from your net income.  It also helps in forecasting you future cash needs.
 

Digging In:
Reports based on Financial Statement Abstraction and Analysis

Financial Statement Analysis:

Horizontal – Comparison of changes in account balances over several periods.

Vertical – Comparison of percentages of expense accounts as a percentage of revenue over several periods.

Ratio – Comparison of one or more balance sheet or income statement account with another, over several periods, or against industry standards.

Comparative Statement of Revenue and Expenses, ranging from monthly to annual comparisons - This report makes it easy to recognize trends in business activity as well as any abnormalities that may occur. 

Graphic Operations Summary – A graphic representation of revenue and expenses for a number of periods (bar chart) along with a representation of the larger expenses related to total expense (pie chart.)  It’s a good document for beginning your analysis.

Revenue Graphs - These show you sales (revenue from product or service sales) trends over time. Revenue is the trigger for success.  Its behavior must be examined frequently. You're looking to push sales upwards relentlessly by making the right marketing plans and executing them well.

Cost-Volume-Profit Charts - Representations of relationships between sales, variable expenses, fixed expenses, and net income for a number volume levels – Allows you to understand relationships between your revenues an expenses over a range of volume levels.  Use it to predict future net income and to begin the examination of what components of revenue and expense need to be changed to improve it.

 Issues Summary – A short summary of the issues that have emerged from the above analysis, prioritized, with suggestions for further action.

Tip of the Iceberg
The analytical work cited above is just the beginning of the problem- solving, opportunity-creation process.  Now, it's time to examine your basis for a sound marketing strategy, determine sales forecasts, fixed and variable cost behavior, business processes, and personnel and management needs for the future.  Redo your business plan accordingly and secure the appropriate financing.

Conclusion

Why you should care.  I don’t even know your business, but I will bet that it’s increasingly about managing change. You want to do better, but your environment is constantly changing.  You must react.  Good decision making requires informed judgement.  And that requires the information generated through the above analyses.
 

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