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Five Numbers to Pay Attention to on Your Financial Statement

Author: Larry Chester, President

 

You might naturally gravitate towards these five numbers on your financial statement, and these figures are a great start for understanding your current financial situation.

But, this is just a starting point. 

Looking at your financial statement on a deeper level means looking past the numbers to see the whole picture.

Looking Past the Numbers 

“I have clients that come to me proudly, stating that they often look at these five numbers on their financial statement:

  • Sales
  • Gross Margin
  • Sales Expense
  • Operating Expenses
  • Net Income

They sit back in their chair, feeling satisfied with their response. I simply ask them the question, ‘How are you going to make actionable changes to your bottom line with those five numbers?’”

They typically don’t have a response.

Those numbers are important, but they don’t provide details to make significant changes in your business. 

I can’t make this point enough for my clients— details are going to be the game-changer in changing your business’ bottom line,” says Larry Chester. 

One way to dive into the details is to look at the numbers behind those five standard numbers. This information can be found in subsidiary reports. The data from these reports provide the opportunity to make substantial changes in your business.

How Does Your Business Measure Up? 

So, how do you think your business measures up? Look through our “How do you measure up?” blog post to find out, and answer questions including:

  • Did my revenue grow vs. a prior period? 
  • Is my business profitable? 
  • What is the gross margin on what I’ve sold? 
  • How much do I owe the bank? 
  • Did the business generate sufficient cash?
  • How much cash do I have? 

These questions are the beginning steps of getting accurate details about your current financial situation. They help you understand variations in calculations, and how to relate them to your business’ performance and operations.

Let’s dive deeper into what ratios you should look into for more details surrounding your financial report: 

  • Gross Profit %:  = (total revenue – cost of sales) / total revenue
  • Operating Profit %: = (gross profit – operating expenses) / total revenue
  • Net Profit %: = net income / total revenue
  • EBITDA: = earnings before interest, taxes, depreciation and amortization
  • Return on Investment (ROI): = net income / (debt + owner’s equity)
  • Return on Total Assets (ROTA): = net income / total assets
  • Total Liabilities to Total Assets: = total liabilities / total assets
  • Total Liabilities to Tangible Net Worth: = total liabilities / ( owner’s equity – intangible assets)
  • Days Sales Outstanding (DSO): = accounts receivable / average daily sales

A Dive into Details

The devil is in the details. Your financial reports will always consist of two (sometimes three) reports: 

  • Balance sheet
  • Income statement
  • Statement of Cash Flows

These three reports provide a broad look into the performance and condition of your company. Once you look past the summary numbers, more details can be found in the subsidiary reports.

The necessary details in the consolidated financial statements can provide broader knowledge on topics such as:

  • Revenues, costs, and margins by product line
  • Inventory turnover – how fast you are selling your products
  • Accounts receivable aging
  • Accounts payable aging
  • Expenses by department
  • Overhead allocations
  • Payroll detail
  • Estimated project profitability versus actual
  • Comparisons to budget, or the same month last year
  • 12-month rolling results

A Final Word

Next time you receive your financial statement, remember it’s crucial to look past your sales, gross margin, sales expense, operating expenses, and net income. Have these details made you reconsider your current financial grasp of your business? Learn if and when you need a fractional CFO on our blog post now.

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