Although your financial year-end can be at any time of the year, many businesses have a Dec 31st year end. This means your accountant will have last year’s financial statements ready by now.
Accounting might be your least favourite part of running your business, but your year-end financials can be a powerful tool to analyze your performance over the past year, compare it to your year-over-year business performance and make informed management decisions moving forward.
Although it is tempting to just look at your financial statements on a standalone basis, it is always good to have something to compare them to. Below are three important comparisons you should be making.
1. Comparison to previous years: If you want to compare your financials to your historical financial performance (which I would highly recommend!), one of the best and easiest ways to do this is by preparing Common Size Financial Statements.
Common Size Income Statements are prepared by expressing each of the line items on the financial statement as a percentage of sales. For example, if your wages were $50,000 for the year and your revenue was $400,000 for the year, your wages would be 12.5% of revenue. If, say, the year before your revenue was $300,000 and your wages were $40,000, your wages would be 13.3% of sales. So even though your wages have gone up year-over-year, they have gone down as a percentage of sales! You are likely being more efficient and/or gaining economies of scale.
You can also do the same comparisons for your balance sheet. Balance sheet items are often expressed as a percentage of total assets.
2. Industry averages: You can compare your performance to other businesses in your industry. Industry Canada has developed a great benchmarking tool to help you prepare a report that compares your business against similar businesses in BC or across Canada.
3. Comparison to your past projections: Comparing your business’ actual results to the projections you set for your business will enable you critically assess your revenue and spending. If your expenses were greater than your projections in some areas, this is a good time to ask yourself why, and to set reasonable expectations for the coming year.
After analyzing your financial statements and comparing them to previous years and to industry averages, you are in a better position to make educated management decisions. It might help you to decide whether it makes sense to hire on another employee this year, or perhaps make cuts to your travel budget.
Never underestimate the value and insight you can glean from spending some time reviewing and understanding your statements!