The Power of Comparative Financial Statements
Your business has a story to tell. And one of the ways to hear your business’s story is by reviewing performance through comparative financial statements.
Pretty important stuff
An up-to-date balance sheet, income statement and statement of cash flows are essential financial reports filled with great information. But these financial statements by themselves don’t tell the whole story about your business. Consider the following:
Liquid Company, Inc.: Their current balance sheet shows $1 million in liquid assets with zero liabilities.
Big Profits, LLC.: Their current income statement has a net profit margin of 35%.
We've Got Cash, Inc.: The statement of cash flows shows that the company has consistently brought in more cash than it has spent over the past three years.
But here’s the rest of the story:
Liquid Company, Inc.: Liquid assets decreased from $5 million to $1 million over the past 12 months, showing their liquidity is not so fluid after all.
Big Profits, LLC: Net profit margin is typically 20% for this company. However, a recent round of layoffs temporarily pushed total salaries and wages lower, thus pushing the net profit margin higher. In this case, big profits may indicate bigger staffing problems.
We've Got Cash, Inc.: There is steady decline in cash flow over the past three years, suggesting a potential cash shortfall on the horizon.
The key in all this is the need to compare your financials to something that provides clarity to how you feel about the results.
Building your comparative financial statements
Step 1: Determine your comparative reporting A standard set of comparative financial statements often includes the following:
Current performance versus prior period actual results
Current performance versus plan
Current performance versus forecast
Step 2: Consider the time-frame of your comparative financials The typical time-frames to consider are:
Monthly (versus last month and same month from the prior year)
Step 3: Build your comparative reporting Be sure it includes:
A dollar change column
A percent change column
Internal percentages as a percent of sales (income statement) and percent of total assets and/or liabilities and equity (balance sheet)
Focus on analysis
The reports themselves can be a daunting array of numbers. So when reviewing each report, try to focus on a few key items of change. Here are some suggestions:
Changes in sales or areas of sales
Cost of goods sold as a percent of sales and how it is changing
Gross margin percent
Net income percent
Advertising and discounting as a percent of sales
Personnel as a percent of sales and how it is changing over time
Identify the top five expenses and see how they change as a percent of sales
Cash flow as a percent of sales and how it changes over time
Current assets and current liabilities
Changes in debt versus equity
Identify key drivers of cash flow and see how they change over time or versus plan
The ability to create comparative financial statements and other useful reports in most small business accounting software products, however, is extremely lacking. Should you need assistance in building the right comparative statements for your business, please reach out for help.