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Understand Your Results – Combining Numbers Won’t Help

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Understand Your Results – Combining Numbers Won’t Help

I bet the first thing you do when you sit down with your accountant is either look at the ‘bottom line’ on the profit and loss statement or ask your accountant what the bottom line is.

Whilst this is a key measure when you’re meeting your accountant for the annual financial statements review, this number of itself doesn’t provide you with any useful information about your business.

Remember though that ‘bottom line’ in accounting-speak means net profit, however, ‘bottom line’ may in your mind mean ‘how much tax do I have to pay’.

Two completely different numbers.

I was recently at a quarterly board meeting with clients where we go through the quarterly figures with the stakeholders. As different board members have come and gone, the quarterly reports have morphed over the years. At times, they’ve been really detailed, at others, more a summary report.

What I find fascinating about these meetings is that everyone at the table has an accounting or finance background. Well, at least, that’s what I’ve been led to believe.

At the latest meeting, there was a discussion about a particular report where we had provided actual figures for revenue, cost of sales and gross profit. Also provided was the budgeted gross profit.

One of the accountants at the meeting said he found this difficult to understand as he couldn’t tell what was really happening. He could see that the actual figures were above budget, but then he wanted to know, was it because they had saved money on the costs or was it because they had achieved higher prices on the sales.

Fair question from a management perspective, however at the board level, all they really want to know is if the business is on track with budget or not and if not, why and what is being done about it.

This is a large corporation, so there are different levels of management and reporting required. So, whilst the question was reasonable, it wasn’t appropriate at that meeting. Other reports are prepared on a monthly basis for the division managers which provide exactly that and more detail.

For most family-run businesses it’s a different story.

You need to see the detail. It’s important for you to see whether the sales are on budget or not, to see whether your costs of sales are on track with budget or proportionately appropriate for sales above or below budget, and to check whether your overhead costs are on budget or not too.

A management report that shows the actual revenue, the budgeted revenue and the variation is important, so too the actual cost of sales, the budgeted cost of sales and the variation.

Then the actual, budget and variation in the gross profit. And keeping going down the profit and loss statement, the actual overhead costs, the budgeted overhead costs and the variations on each line.

I believe that the more detail you have in your management reports the better able you are to keep a tight rein on expenses and see how you’re tracking to budget. And yes, you need to have a budget.

A budget is simply your goals for the business in number format.

The simplest version is to look at your overhead expenses for the prior year, add a small inflation increase to them and that’s the overheads done. Then set your revenue goal and using that proportionately adjust your cost of sales up or down by a similar percentage.

And hey presto, you have a basic budget that you can monitor your numbers against on a monthly basis.

By all means, check the big picture, are you on track to reach your financial goals, yes or no?

But don’t forget that you can reach a revenue target you set but not make any more money, and potentially less money, if you don’t keep an eye on the costs too.

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