Over the past few weeks, we’ve discussed how to create and understand your financial statements. Now it’s time to turn our attention to reviewing and assessing those statements.
Regularly analyzing your financial data is essential to:
- Determine if your business plans are working
- Identify problems such as theft or fraud
- Evaluate how your business compares to others in your industry
- Spot trends that may positively or negatively affect your revenue
Are Your Plans Working?
Your cash flow worksheet was based on projected monthly sales over two years. You made critical business decisions—such as hiring staff, leasing space, and applying for financing—based on those projections.
If your actual revenue is falling short of projections, you may be burning through cash faster than expected. Identifying that early allows you to make adjustments, cut expenses, or secure additional funding.
On the flip side, if your revenue is exceeding expectations, you might be struggling to meet demand or maintain excellent customer service. In that case, you may need to hire more staff or set clearer expectations with customers regarding delivery times.
Identifying Problems
When I owned a restaurant, we were required to complete a weekly profit and loss statement and submit it to headquarters along with our royalty payment. Two numbers I always paid close attention to were payroll and cost of goods sold (COGS).
Our goal was to keep payroll under 22% of revenue and COGS under 35%. If either number was too high, it triggered an investigation. Here are some examples:
Payroll Red Flags
- Overstaffing during slow periods: I reviewed scheduling during off-peak hours and made necessary adjustments.
- Employees clocking in early or out late: I compared timecards to the schedule. One student used to come in early to do homework, but I didn’t realize he was on the clock!
- Overtime pay: This often happened when a nearly full-time employee picked up extra shifts. We learned to ask part-time staff to cover instead.
Inventory Red Flags
- Improper food preparation: Mistakes led to waste. We retrained employees or reminded them to follow special instructions more carefully.
- Excess food on the buffet: Supervisors learned to reduce what was put out in the last 30 minutes of service.
- Ordering errors: Overstocked perishables spoiled; running out meant buying from local stores at higher prices.
- Theft: This included employees eating food without paying, giving away food, or failing to ring up sales and pocketing the cash.
Even if you’re not in the food service business, these examples illustrate how to track down the causes of higher-than-expected costs.
Comparing to Industry Standards
Analyzing your financial statements also helps you understand how your business stacks up against others in your industry. Industry benchmarks are available through association data, IBISWorld reports, and other sources.
For more on this, check out my blog: Comparing Your Financial Ratios to Industry Standards – Susan’s Reflections
Spotting Financial Trends That Spell Trouble
Declining sales volume is a major red flag. A brief dip might be seasonal or due to temporary competition. But if the trend continues, take a closer look:
- Customer service issues: Even one rude or careless employee can cost you business. Many customers won’t complain—they’ll just leave.
- Product quality issues: Poor-quality goods can lead to returns and dissatisfied customers.
- Missed deadlines: Late deliveries frustrate clients. Evaluate every step in your supply chain to find and fix delays.
Rising accounts receivable can signal that your customers are struggling to pay. This slows your collections, reduces cash flow, and makes it harder to pay your own suppliers. If your receivables are growing:
- Identify which customers are paying late and ask why.
- Consider adjusting their credit limits or payment terms.
- Project your cash flow for the next few months.
- Talk to your banker about a line of credit, and ask suppliers for more favorable terms if needed.
Declining profit margins are another warning sign. Investigate the root cause. It could be:
- Rising supply costs: Due to inflation, fuel prices, or shortages. Consider discontinuing low-margin items or sourcing more affordable alternatives.
- Increased wages: If labor costs have risen, look for ways to improve productivity or automate processes.
- Higher operating expenses: These might include utilities, insurance, or telecom services. Shop around for better rates, reduce waste (like leaking pipes or lights left on), and review whether you’re paying for services you don’t need.
Final Thoughts
Every business is different, but all must control costs and protect profit margins. Assessing your financial ratios regularly helps you identify problems early—before they impact your bottom line. Use the examples above as a guide to evaluate your own financials, make informed decisions, and position your business for long-term success.
If you’d like help reviewing your financial statements or identifying potential issues, don’t hesitate to reach out. I’m here to support you! You can email me at susan.ball5@aol.com.
Susan's Reflections 
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