Every business should do a periodic pulse check through a deep dive of its Profit and Loss or Income statement. This is a vital financial statement that measures the financial performance of the company in any given period.
While many large businesses examine these statements on a monthly basis given the scale and complexity of their operations, a small business should ideally do so at least once a quarter. If you are new to the exercise, here are some pointers on what you should look for in this analysis:
Comparison with the previous year’s numbers:
This is a quick and easy check of steady, linear growth. Track your revenues and expenses and compare them to corresponding figures from the previous year. You could even go back one more year to better isolate the trends in your numbers. Ideally, you should see revenues outpacing expenses over the period you are looking at.
Examine your top expense categories closely:
Your top expense categories will typically comprise 80% of your costs and those are the items that you need to zero in on. Evaluate how your primary operating expenses – items such as manpower, utilities, travel – are contributing to the bottom line. By estimating what percent of revenue each of these comprise, you will get a quick read on business efficiency.
Drill deeper into anomalies:
If you do notice any anomalies in your spending patterns with certain categories, try to get to the bottom of these. If travel costs contributed significantly to your expense structure in a given period, you may want to investigate what caused this. If it is driven by business development, for example, you can choose to view it as an investment that will pay off down the road.
Sundry expenses and petty cash:
There are other smaller items that add to your expenses and that you will want to retain control over. To close operational loopholes or prevent instances of pilferage when it comes to things such as supplies and inventory, do a weekly stock take and an inventory reconciliation exercise.
A similar approach for petty cash will help you keep a lid on smaller expenses that can add up in the long run. These checks and analyses tied to revenues, income and profitability are routine in a large company. It requires discipline for a small business operator to get them in place early on, but is well worth the effort.