What to Do with Your Financials

The creation of your financial statements is largely a mechanical exercise. The numbers to be used are found in your accounting records after the books are closed at the end of the period; to draw up the statements, you, your accountant, or your accounting software simply look up the numbers and plug them into the statement.

Using the numbers to your benefit. The real value to the statements comes after their creation, when you analyze them to see how your business is doing in numerous areas. You don't have to know the exact makeup of each item on the balance sheet and income statement, but you must have a sense of what the numbers mean in order to interpret and analyze these financial records. Raw data in isolation does not make sense — it is in relation to what that counts. The following discussion will help you make sense of the data.

Below is a checklist of issues you may want to consider after your financial statements are prepared.

• Develop common size financial statements to compare
• present performance with past performance and
• the condition of your business with that of other similar businesses.
• Develop the key business ratios for the business to compare
• present performance with past performance and
• the condition of your business with that of other similar businesses.
• Consider the impact on the performance picture of
• inflation and
• different accounting practices and procedures
• Project income and construct a cash flow budget to assess production requirements and financing needs.
• Achieve a fair return on investment (capital) at a level of risk acceptable to you.
• Maintain working capital at sufficient levels to support operations.
• Maintain a proper balance between current assets and fixed assets.
• Establish and maintain a proper level of capitalization with the best mix of short-term and long-term debt financing and equity financing.
• Examine your fixed and variable costs and relate them to profits.
• Evaluate and project how markets, products, competition and sales affect and will affect your profits.
• Establish the contribution margin for your business and for your various product or service lines.
• Establish a breakeven point for the business as a first step in determining how changes in sales will affect costs and profits.
• Review the degree of operating leverage in the business and its effects on operating profit and return on equity.
• Consider how growth in sales and profits usually increases the need for financing.