This is a series of posts that will help the business owner understand their financial statements and give them valuable information so that they can take corrective action or proactive measures to preserve their position in their market.

The first metric is “current year results to same period last year.” If you have any type of accounting software system (from Quicken to Simply Accounting to Quickbooks) this is a report option. You should examine a few key metrics:

  • The change in revenue – dollar and percentage change.
  • The change in gross profit margin, specifically” the GPM this year in percentage terms to the same period last year.
  • The change in general and administration overhead in dollar and percentage terms.
  • The difference in net profit

You should know this and it may be a rhetorical question but “why did the revenue increase or decrease?” Has the change in revenue been accompanied by a retention of the gross profit margin (GPM) from the year before? If it has changed, why? Increases in revenue are not always a good thing if the business has to reduce prices to get it. Input costs could have eroded margins as well.

Administration overheads usually increase lockstep with increases in revenue but they shouldn’t. If revenue declines administration overheads usually do not drop but may creep upwards because of inflation or increases in rent charges.

On the balance sheet, compare your working capital position this year to the same period last year. Your w/c may be higher but it could be due to growth in trade receivables that are slow being collected and this has resulted in higher trade payables and even slow payments to the Canada Revenue Agency.

A quick rule of thumb on comparative liquidity for a business is found by calculating the working capital in dollar terms this year and dividing it into revenue. Divide this result into 365 days and you will see how quickly w/c turns over this year. Do the same for last year and compare.

 

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