For your business numbers to tell you about the state of your business, you first…
When Numbers Stand Out
Numbers on a sheet of paper can look like mumbo-jumbo if you don’t know what you’re looking at or what to look for.
Financial statements are in essence a list of numbers and whilst they do have meaning when you understand what they are, even if you don’t have a great grasp on the concepts, some numbers will stand out.
Let’s take the example of a profit and loss statement. If you take a cursory glance over the figures, I’ll bet that one or two numbers will stand out to you. Different numbers might stand out for me when I look at the same figures.
To get the best information, I recommend looking at the following:
The obvious and often the first number that people look at (if they don’t look at the profit figure first).
First glance is to see how the income compares to either your budget or if you don’t have a budget (which I recommend that you do) the weekly/monthly/quarterly revenue target that you’ve set for the business.
One client I worked with had an annual revenue target of $1M and each time they looked at the income number they were checking to see how they were tracking toward that target. When the number was indicating they were below target, they busied themselves getting in new work and finding ways to turn around existing work quicker.
Another client had different sources of income and was wanting to change the mix of the revenue. The number that stood out for her was the income from the revenue source she was aiming to increase. So, whilst the overall income was important, she was looking to see that the new revenue line was increasing each month.
A quick glance through the list may result in some numbers standing out. The key is to determine the story behind those numbers.
I recall going through annual financial statements with a tax client back in my accounting practice days, and the client immediately pointed to one number and said quite emphatically, “That’s wrong.”
We delved into the accounting system to see what payments had made up the figure and found that his bookkeeper had incorrectly entered the workers’ compensation premium as consulting fees. So whilst overall the figures were correct, the number that stood out was an error in allocation.
In another case, the advertising number stood out, and again, we delved into the accounting system to see what made up the figure, and in this case, the allocations were correct. The client had forgotten and/or not realised how much they’d spent on advertising during the year. It was a wake-up call to her to keep a better watch on her spending in this area.
Whilst this number may not stand out as such; it is a number that we all want to know. What’s the bottom line or how much profit have I made (or not made)?
This is a key number to be watching. It’s all fine and good to have an income target and be focused on that on a daily, weekly, monthly basis, but you need to make sure that you’re making a profit too.
One lady I met a couple of years ago had recently experienced massive growth in her business. She had put on more staff and was really pleased with her income level. But … She wasn’t making any profit, in fact, she was losing money, and she couldn’t figure out why.
With increased income comes higher costs and, in her case, inefficiencies in the team delivery of services was severely impacting the numbers. The higher costs related to bigger premises, more salaries and employment costs, and increases in associated costs like printing and stationery, electricity, staff amenities and so on.
These were not insignificant on their own. But when added to new team members taking significantly longer to deliver services than was expected, it was a recipe for disaster. Once these stand out numbers were identified, she went through a process of consolidating and over a period of time pulled the business back into a profit position again.
Next time you review your financial statements, see what numbers stand out for you.
Then delve into the detail to find out whether there is an allocation error that needs fixing, whether you’ve been spending money without realising how much it has added up to and/or determine what action you need to take to change the numbers for the next period so that they aren’t the stand out numbers.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
SHARE THIS ARTICLE WITH LIKE MINDED SMALL BUSINESS PEOPLE