| by John Ryan,
Eastern Iowa SBDC, Davenport, IA hotel hilton SinaiaYou're a successful business owner with an annual profit in a growing business with a decent balance sheet. You sit back at year-end, reviewing your income statement and balance sheet and smile a self-satisfactory smile. Life is good! Or is it? Unfortunately, the best prepared statements based on the best kept records still don't tell you several things that are essential for you to know if you are to continue to be a successful, thriving business such as:
- The future is never recorded, or even previewed, in your statements, only the past. If you are not actively researching future economic and market conditions, reviewing the competition and your own production costs, examining technological changes and altered means of distribution, you are leaving yourself open to the wrenching changes which are a constant part of the 21st century business world. Study and plan for the day after tomorrow.
- Most income statements don't show you what your most profitable lines of endeavor are. The well-known 80/20 rule, that 80% of the return comes from 20% of the effort, most likely applies to your business. Are there certain products or services you offer which make much more profit than others? Of course! So, be certain that you somehow capture that knowledge during the course of the business year and use it.
- The depreciation sections of your income statement and balance sheet are usually viewed only as numbers by the reader, with no relation to the reality of the state of your machinery, equipment, facility and rolling stock. The depreciation line must be viewed as more than a welcome addition to cash flow without requiring real money. Take a serious, organized view of your physical assets (and keep a record of it) annually or more often. What should be replaced when? What technological changes may require big changes in your operation? When will you need to add onto your building? Is your equipment worth more now than then what you paid for it or is it falling apart faster than the depreciation schedule says it should? What impact will all of this have on your future cash needs and potential borrowings?
- The balance sheet shows you a dollar value for your inventory, if you're a retailer or producer of goods. Nice to see it grow—unless you had to pay for that growth out of earnings or borrowed funds and aren't turning it over quickly. When is the last time you really reviewed and evaluated your inventory? Is it really worth what shows on your statement—or are there loads of dollars sitting unused and unusable.
- Statements are a history of what has happened and thus, have value for reviewing the past and its successes. But they don't show lost and missed opportunity! So you've captured 30% of the market: why didn't you get the other 70%? Is it imperative that you look at the customers you don't have, the sales you didn't make, the market segment you didn't penetrate? Then ask, in detail, with methodology and intent and aggressively, why those potential customers are not customers. There is next year's opportunity.
So, review the joys of the past year's statements, think long and hard of what they don't tell you. > See also: Accounting & Finance |
