wow clients with trend analysis

comparing the statement of operations with the balance sheet. bonus: the five numbers needed to run a better business.

by ed mendlowitz
77 ways to wow!

the sample statement of operations report below was created using excel to better illustrate and highlight the differences. this also enabled entering selected percentages, which cannot be done on most computer-generated financial statements. most computerized reports can be exported to excel with a couple of clicks.

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besides the percentages included below, a helpful percentage would be increase or (decrease) in monthly sales, or any other item you want to track. in the illustration, monthly purchases to sales and cost of goods sold percentages were tracked.

note that inventory was not adjusted on a monthly basis and was typically changed annually when the annual financial reports and tax returns were prepared. this report is for an interim period.

 

 

sample: balance sheet

 

 

key to differences in trends

details of the differences in the statement of operations and balance sheets shown above:

statement of operations

month 3

purchases: an extra $50,000 of purchases was received.

month 4

purchases: $50,000 was received in prior month correcting the differences.

month 5

general and administrative: a $12,000 payment was not made.

month 6

overhead – fixed: a $25,000 payment for a flood damage repair was paid.

interest: the payment was not taken out of the bank account by the bank and was not corrected as of end of month 9.

month 7

purchases: $50,000 was erroneously posted to inventory.

selling expenses – fixed: a $50,000 payment was made for an advertising program.

general and administrative: the $12,000 not paid in month 5 was paid.

month 8

a $20,000 loan was made to a salesperson – this was posted incorrectly and not corrected as of end of next month.

balance sheet

month 7

cash: the $50,000 for the advertising program was paid.

inventory: $50,000 of purchases was posted to inventory rather than purchases.

month 8

cash: $100,000 of accounts payable was not paid.

accounts payable: $100,000 of accounts payable was not paid.

month 9

cash: $50,000 of accounts payable was still not paid.

accounts payable: $50,000 of accounts payable was still not paid.

the quick way to review and analyze the p&l

1. look at the total column at the extreme right of the profit & loss statement. this gives the profit & loss report for the entire period.
2. look at the top to see the gross sales or revenues. this gives you a sense of the size of the business.
3. next look at the bottom line – this gives you the net income or loss for the period. now you know if the company is profitable and how much, or if it lost money.
4. next comes the “trend” part. slide your eyes across each column looking to see monthly variations.any variation (either high or low) should be look at to see if anything unusual or out of the ordinary occurred during that month. if so, look for the reasons or answers.in some software such as quickbooks® the reasons can be easily researched by placing the cursor on the amount until it changes to a magnifying glass with a “z.” a left click will show you the detail of the entries making up that total for that month. if you need further information, you can look at the backup information such as the check, invoice or bill for the amount you don’t understand.
5. keep in mind that you are looking for larger items and larger differences. a 200 percent variance on a $100 item will not yield you as much benefit as an 8 percent variance on a $20,000 item. keep the big picture in mind.
6. one way of starting and using your time profitably and efficiently is to concentrate on the more important and meaningful items until you get a comfortable grasp of what makes up those items. for example, for most businesses the three major items are sales, purchases or direct costs, and payroll costs. telephone, office supplies and garbage removal no matter how large the differences are not significant. an exception might be bank charges, where there usually shouldn’t be anything more than a minimal amount. any change there could indicate a declining cash balance where the bank is paying checks you issued against uncollected funds or charges for bounced checks. also, don’t close your eyes to obviously incorrect or illogical amounts.

the quick way to review and analyze the balance sheet

1. look at the shareholders’ equity or capital account at the bottom of the extreme right column. this gives the net worth of the company, per the accounting records. net worth can be called “capital,” “members’ equity,” “stockholders’ equity” or any similar terminology.
2. next, also at the extreme right column, look at the total current assets and subtract the total current liabilities.this gives the working capital. positive working capital is good while negative is bad. the higher the positive, the better. the higher the negative, the worse it is.
3. compare the working capital to the net worth. the closer they are to each other, the stronger the creditworthiness of the company.
4. another item to look at is cash, to see the trend if it is rising or dropping.
5. next comes the “trend” part. note that on the profit and loss statement the monthly amounts represent the transactions for the month. on the balance sheet the amounts are the month-end balances of each asset, liability and equity account. slide your eyes across each column looking to see monthly variations. any variation (either high or low) should be looked at to see if anything unusual or out of the ordinary occurred during that month. if so, look for the reasons or answers.the reasons can be easily researched by placing the cursor on the amount until it changes to a magnifying glass with a “z.” a left click will show you the detail of the entries making up that total for that month. if you need further information, you can look at the backup information such as the check, invoice or bill for the amount you don’t understand.

purpose of trend analysis

1. the purpose of the trend analysis is to detect trends before they become evident. favorable trends can be taken advantage of by flushing out and exploiting the reasons to help the business grow and be more profitable. unfavorable trends can be uncovered before they become entrenched in the business and embedded in the operations or culture, making them harder to halt or reverse.
2. because we are looking to spot trends, it is important for the numbers to be current and as close to real time as possible.for that reason, the best time to look at the trend is as soon as the month ends – not waiting for bank statements so the cash accounts could be reconciled, or late received vendor invoices to be entered, or inventory to be counted. the trend is a forward-thinking tool using historic data to guide the thinking or analytical process. don’t confuse the numbers reviewed with deliberatively prepared historic tax return numbers or (generally accepted accounting principles) gaap-basis financial statements.
3. the use of the trend analysis is to support strategic goals and enable actions to take place much more quickly than they could if you had to wait for exact numbers. accuracy in the numbers is not as important as the use, thinking, planning and discussion that would accompany a trend analysis. however, accuracy is always a goal.
4. another goal, albeit a lesser one (only a slightly lesser one), is to attain completeness and records as up-to-date and as accurate as possible. the month-end deadline fosters this.

for those whose software cannot transfer financial reports to excel

a trend analysis can be prepared by many accounting programs. for those without that ability, excel and other spreadsheet programs can be used. what is required is to enter the balance sheet and profit and loss or trial balance amounts each month and then configure the spreadsheet program to transfer the monthly numbers into the trend format.

the trend format has each month side by side. we have found that setting up the spreadsheet with a section to enter the cumulative monthly information in consecutive columns, and a second section with the monthly data obtained by subtracting the previous month’s cumulative amounts from the current month’s amounts, will provide the monthly data in a neat column-by-column format.

just two minutes a month

using spreadsheet output software creatively, deliberately and with focus for about two minutes a month can provide myriad data about the business or organization that can help the manager detect and react to incipient trends so they can lead the business rather than react to what has occurred after some damage has been done.

graphic demonstration of trends

following is a graph that quickly illustrates the entire story: a retail business moved from a high-rent district to a lower-rent area. notice how the gross profit dropped. and after taking into account other costs, such as payroll and fixed expenses, the business is no longer viable.

 

 

the five numbers needed to run a better business

spending three minutes a day looking at five numbers can provide needed controls, insights and overviews.

every business is different, but all have similar concerns – controlling cash, sales, payroll, purchases, and understanding the break-even sales point.

1. cash: there is no reason why an owner or manager can’t pull a report each morning that shows the total cash collections and disbursements for the previous day along with the cash balance and month-to-date totals. not being able to get this and the other four things would indicate serious problems with essential business controls.
2. sales: the previous day and month-to-date sales. try also to get it by major product lines.this is the heart of the business – clients must know whether their billings and shipments are on target for the month. if possible, they should review their order backlog and partial shipments and be able to understand increases and decreases.
3. payroll: this is usually the largest or second largest expenditure for most businesses. look at it weekly by employee and understand what each person does. compare the current week with the previous week and the same for the year before. also review overtime pay, commissions and extras that might be paid for.
4. purchases: if your client deals with a product, get the daily and month-to-date shipments received. make sure they are receiving adequate supplies so they can ship timely. know whether inventory is increasing or decreasing and why. understand the shipping schedule and pattern of their suppliers.
5. break-even: target a daily and weekly sales amount. they can almost instantly know if they made or lost money (and how much) by properly measuring their sales against the break-even amounts.

posted on may 29, 2023