Are your Financial Reports Giving you Useful Information

Do you look at your financial reports with bewilderment, frustrated that you’re not getting information that is useful for you to manage your business?

The answer may just be that your accounting system has been set up to make it easy for your accountant to produce financial statements, not for the easy production of management reports.

Management financial reports are fundamental to success in business.

If financial reports are set up to provide you with the information you want and need to be looking at, they are a fountain of information and insights into what’s happening in your business: the good, the bad and the downright ugly.  

Does your profit and loss statement show just a couple of lines for income and then the expenses listed alphabetically from A to Z? If the answer is yes, it’s time to shake up your reporting.

HERE ARE THREE WAYS TO LOOK AT YOUR FINANCIAL REPORTS:

INCOME.

Think about the different income streams you have in your business, it may be the type of work you do, the types of clients or customers you serve, or if you have a product business, they may fall into a few different categories. What information would you find useful to know?

Examples are:

1. Income by different industry segments – e.g. professional services, medical, construction, hospitality
2. Income by salesperson if you have a sales team that is driving revenue
3. Income by types of service – e.g. web design, printing design, advertising design
4. Income by the client, this can be useful if you have a few key large revenue clients
5. Income relating to special occasions – e.g. Valentine’s Day, Mother’s Day, Father’s Day 
6. Income from special promotions

The key is what is relevant to your business, which would be useful for you to know. 

COST OF SALES.

These are the direct costs that relate specifically to income. If you sell products, this is the cost of purchases, including freight and delivery costs.

If you sell services, this would include any external costs you are required to spend to deliver the service, and it should include the employment costs of staff who are performing those services in addition to the external contractors employed for delivery.

The allocation of the cost of sales works if it can be aligned to the segmentation of the income. If you are able to do this, you’ll be able to identify the profitability of each segment of your revenue. 

A business colleague of mine had three distinct services his business delivered. His instincts told him that one was the most profitable, it was the one area where the team spent the most time, and they had high volumes of work.

When we split the revenue and costs of sales into the three segments, we identified that that segment was actually losing money badly. One of the other service areas was making extraordinarily good profits and was, in essence, supporting the segment with the high volume. 

Without segmenting the details in the accounting system, he would never have known.

EXPENSES.

Ideally, expenses work well from a management perspective when split into different categories.

The main categories that apply to most businesses are:

1. Sales and marketing – this might include website costs and PR costs
2. Employment costs – including staff amenities, training, workers comp insurance
3. Costs associated with premises – rent, electricity, cleaning, repairs and maintenance
4. External consultants – accounting fees, bookkeeping costs, legal fees, HR consultants, business advisory coss
5. Motor vehicle costs – registration, insurance, petrol, services, tyres
6. Bank and merchant fees – this could also include interest expense
7. General business expenses – this is the catch all for everything else, and includes, computer expenses, printing & stationery, postage, telephone, internet, travel costs, parking, tolls, filing fees, registrations, subscriptions, memberships, business insurance.

YOU MAY HAVE OTHER CATEGORIES THAT YOU WANT TO KEEP SEPARATE AS WELL.

Personally, I also split out my online subscriptions into a line for each one as a way for me to easily check each month and make decisions about whether they are necessary for my business.

When looking at the different groups of expenses, you’ll soon identify how some of your costs are the same each month, i.e. they are fixed costs, while other costs you have discretion on how much you spend.

Once you’ve got this information you can identify your break-even revenue and consider just where and when you spend on discretionary costs.

Useful reporting is designed for you as the business owner to manage your business and see where the revenue is coming from, what your cost of sales are, and what your fixed and other costs are.

And this helps you to feel like you’re in control of what is happening in your business with the numbers.

Originally published on www.smallville.com.au