Making sense of your Accounting Reports
Continuing on the theme of Benchmarking, let’s take a closer look at the 3 ways to measure a financial report. You can measure it to a previous period, you can compare it to a budget, or you can measure it against other similar businesses.
Compare to Another Period
This is the easiest way to measure your results – you just run a P&L and select to compare this period to earlier ones (last month or quarter, or the same period last year).
Review the report to see if your results are getting better or worse? Often putting the summary figures into a graph will help as a graph will reveal any trends really clearly.
And identifying the areas that are not trending the way you would like will tell you where to focus your attention to try to improve performance.
But a prior period report isn’t always the answer. What if your business (or the market you are operating in) is changing? What if you are comparing 2020 (Covid!) with 2019 – it is not a lilke for like comparison. Well then you might use a budget.
Compare to Budget
To do this you will need to sit down and work out a budget – this doesn’t need to be very sophisticated, it is really just a financial plan, but if you’ve not prepared one before it can be pretty daunting. You can find guides to creating a budget via a Google search, or complete the form below to access our free excel cashflow template. Any of the Viridity team will be able to help as well. Far too few SMEs bother with a budget, but it is one of the most important planning tasks you can undertake.
Armed with your budget you can report your P&L figures compared to it – you can investigate any differences why – and more importantly what you can do about it in the future. If you make a habit of doing this every month you will be in far greater control of your business than if you wait for your accountant to tell you your profit figure at the end of the year.
Even a budget may not be a complete answer – maybe you are being unrealistic in setting the budget targets, maybe you could be doing much better.
Comparison to Other (similar) businesses – or “Benchmarking”
Comparing your business to others can be a great way to measure how you are performing, as you now do get an “objective” yardstick.
There are companies that sell this information (again Google makes these easy to find), but if your business is too small to justify the expense there is a free alternative. The ATO recently released performance benchmarks for 50 different types of business, and you can use this information to measure how your business is performing. From the many thousands of tax returns lodged with the ATO they are able to assess the “normal” ranges of ratios to sales of cost of goods sold, labour and rent and other expenses. You can use this data to compare to your business.
You can access the ATO data here, or if you would like to see a more detailed guide on how to apply this to your business please reach out to our team, we will be able to work through the best option for your business.
Whatever approach you take, we can’t stress how important it is to run and analyse your financial reports. You wouldn’t drive your car with occasionally glancing at the speedo, the fuel or temperature gauge, you wouldn’t cook a meal without checking the oven temperature, just so running a business without accessing the information available to you is a recipe for disaster. This is the ONLY information you have that no one else does – economic trends, supplier prices, competitor prices, etc are all in the public domain, but your financial data is yours alone: analyse it well and you have a unique insight to your business.