Business financial statements deliver a record of past events and, more importantly, reveal the direction you’re going in. Examining a few factors within the numbers will show you how to control your destination.
A key area to evaluate among multiple periods is the past fluctuation in revenue based on various amounts of spending for marketing, labor and perhaps other categories of expenditure. For instance, see if periods when you spent more on your website resulted in subsequent months of rising revenue. Or maybe your sales tended to rise when you increased business meal expenses by taking more customers to lunch. The key is to repeat actions that enhanced revenue and avoid spending on things that were not fruitful.
Another useful measure is revenue per dollar of labor expense. A solo operator may simply examine revenue per hour, since an entrepreneur devotes time rather than money to attaining revenue. Shifts in these ratios inform you about the productivity of staff or independent contractors or even yourself. A falling ratio of revenue to labor cost may indicate you have excess staff. Perhaps projects are assigned to the wrong personnel or presented without sufficient instructions. Maybe your business has outdated equipment and making new purchases would enhance labor efficiency.
Find out if variances in revenue are the result of selling more to each customer or a change in the number of customers. To measure this, divide revenue by the number of customers. If you sell many things to a broad market, you’ll benefit from monitoring the gross profit margin of each product or service sold. Discussing ratios with your accountant will assure that you make optimal use of financial statements rather than rely on gut feeling.