Financial statements are produced at least annually by the accountant. This ritual usually occurs at the end of the calendar year along with the tax returns. Most owners look at the bottom line to see how much money they made, if any, and then file the reports away, never to be looked at again. There must be more information than if the company made money or not.
These reports are actually a numerical representation of the business. This means the owner has been handed a quantitative representation of his business. A quantitative representation allows for comparisons to prior periods or to look for trends for items as important as Sales, profits or large expense items. Comparisons to other categories on the financial statement will produce ratios or percentages that also give insight into how the company performed. A commonly discussed and monitored percent is gross profit. This is the percent of every sales dollar that goes to covering expenses and contributing to profit. This number can be tracked over time to determine if it is increasing, a good thing, or has been decreasing.
Graphs can be easily produced, typically showing the trend of major items over time. These graphs are easier to understand then just raw numbers. Good items to graph are sales, profit, gross profit and any large item appearing on the financial statement.
Now that you have all this information what should you do with it? Each owner and operator has an item or items that they feel give them the best sense of how a business is doing. They use this information to then decide what they need to do to improve results. Each business is different with its own issues. Some numbers are more important in one type of firm than in another. Certainly a clothing store is not comparable to a hardware store. The importance of various numbers is different between the two types of businesses. Inventory is an important number that is discussed in the business newspapers and the business news programs. The number of times the inventory turns over or the amount of inventory in days on hand are both discussed often. At the clothing store this number is more important than hardware store because there is seasonality to the inventory. Goods not sold by a particular date, will not sell any more this year. There is also an issue if they will go out of fashion. This does not occur at a hardware store. A hammer can be sold any time of the year and does not go out of style next year. I still use my Grandfather's tools.
The type of business, the size of the business and the customers it services all should be considered when deciding what numbers should be reviewed. A good source of what to look at and how the business is doing is obtaining your industry associations statistics and matching them to your business. Once you have this information it is a good idea to review them with your management team and accountant to develop a plan of action on what you will be doing over the next period to improve your results. Lowering inventory will decrease the operating capital in the business and free money for other uses. The same can be true for accounts receivable. Armed with what you want to accomplish make a list of who is going to do what. These activities need to be monitored to make sure that they are happening and your goals are being achieved.