- June 5, 2023
- Posted by: Katelyn Reaburn
- Category: Blog
Understanding the Story Your Business Financials are Telling
There are many aspects that come together to make a business – the service or product you provide, your customers or patients, your staff, etc. But how can you evaluate these factors to see how well they are working for your business? Earlier this year, we discussed how macroeconomic conditions can affect your business. This month, we will discuss how to dig into your financials to better understand your business and to help move your business forward. Starting with some of the basic pillars of your business finances, we’ll discuss how to understand these numbers, how to analyze them, and how to apply them to your business needs.
Top Line vs Bottom Line – What Do They Mean?
When evaluating the success of a business, it is important to consider both top line and bottom line. The top line refers to a business’s gross sales, while the bottom line is a business’s net income once expenses have been deducted. The bottom line can also be referred to as net profit. Top line gives insight into how a company is generating revenue, while bottom line gives insight into how efficiently a company is servicing that revenue. For example, a company may appear to be profitable on the surface level if they are generating a very high monthly revenue. However, the top line doesn’t show inefficiencies in ordering, staffing, etc. The bottom line in this example could reveal a less profitable company, once expenses were taken into consideration. Conversely, a company may not seem to be entirely successful based on a low top line figure, but looking into the bottom line may reveal that while the company is not generating a large monthly revenue, they are operating very efficiently with low monthly expenses.
The Profit and Loss Statement
The Profit and Loss statement (P&L), also known as the “income statement”, is one way to review your company’s revenue and expenses and determine your net profit. The P&L statement breaks down your various sources of revenue (i.e., by employee, doctor, salesperson). The P&L statement also includes any Cost of Sales or Cost of Goods Sold. These are expenses that are directly related to the services you provide (i.e., materials, lab fees). Finally, the P&L statement lists your various Operating Expenses. These are expenses not directly related to sales (i.e., rent, utilities, general office expenses), but are necessary expenses to operate the business. The P&L statement will utilize all of this information to calculate the net profit. This is what your company has actually made for that period of time, once all expenses are taken into account.
Digging into the Details – Metrics and KPIs
Metrics are a useful way of measuring business performance, and may include number of patient visits, sales per week, time-based visits versus non-time-based visits, production per hour, breakdown of meeting or appointment type, etc. Metrics allow you to look at various aspects of your business and assess your productivity, efficiency, profitability, etc. Some metrics, called lagging indicators, can be used to evaluate past performance, such as after a particular business event. Conversely, leading indicators give you a proactive look to help prevent negative results or to foreshadow positive business results. Similar to metrics are Key Performance Indicators, or KPIs. KPIs track progress toward a specific goal and are generally more high-level. For example, achieving 30% growth by the end of the year. When creating KPIs, it can be helpful to follow the SMART scheme – Specific, Measurable, Attainable, Relevant, and Time-Bound. This will help you to create a more valuable and effective KPI.
Once you know what KPIs and metrics are important for your business, you can set targets to work towards. These targets may be working towards higher profitability, lower costs, higher efficiency, etc. In order to create targets, it is important to look at both the past performances of your business and industry statistics. From there, you can determine areas of opportunity to either improve or build upon further. For example, some useful targets may be total sales for the month, a goal for production per client visit, total number of sales calls completed, etc. These targets can help drive your business forward. An important thing to note when it comes to targets – they should not be static. You must consider the ebbs and flows of business throughout the year. Are summer months typically slower? Is October always a busy month? As well, you should always keep a pulse on your targets to assess how well they are working for your business and to determine if adjustments need to be made. Too high of goals may feel unachievable and demotivating, while too low of goals may not be motivating enough and be too easily achieved, thus not pushing your business.
You’ve reviewed your profit and loss statement and assessed your KPIs – now what? Once you have a clearer picture of your business’s current state, you can make more impactful decisions of ways to improve your productivity, efficiency, and profitability. For example, a lower net profit may be the result of high operating expenses. This may be an indicator that you need to take a closer look at your company’s spending – are you ordering effectively, what is your current inventory process, are materials being utilized efficiently? Another example is looking at employee productivity. If an employee is generating higher production but is seeing a very large volume of patients or clients, they will have a low production per visit metric. While high production is desirable, it would be more beneficial for an employee to be generating this production with a fewer number of patients/clients, and thus having a higher production per visit. This would show a more efficient use of time, and is generally more sustainable than having to continually see a large number of individuals to hit this same result.
Applying this Information
You can take things a step further by looking at the differences in profit, KPIs, etc. month-to-month and even year-to-year. Taking a look at the financial trends of your business is important for keeping ahead with any declines in productivity and profitability, and contributes to staying agile in changing markets. Reviewing the trends of your finances can also help you to make business decisions. For example, based on recent months and looking at the productivity in previous years, you can make a more educated decision on when to make larger purchases, if additional staff are needed, whether expenses need to be reduced, etc. When reviewing your finances, it is important to have timely financial statements in order to make these decisions. At a minimum, small businesses must file statements annually with the CRA. However, the more relevant and timely your data, the better. Getting quarterly statements, or even monthly if possible, is key. Ensuring you have an understanding of the full picture of your business’s finances while using up to date financials is prudent for making well-informed and business-savvy decisions.
In summary, it is important to always dig deeper when it comes to your business’s financials. First, taking a closer look at your results and KPIs may give a different story than how your business appears at first glance, so it’s always important to dig a little deeper. Second, KPIs are important for setting goals and expectations for the month. Third, preparing timely statements is necessary, so aim to do so on a quarterly, if not monthly, basis. Finally, it can be helpful to have a team of trusted financial and accounting advisors to help you gather this information and provide you with suggestions on how to efficiently run a business. At MAP, our team excels in analyzing results and strategizing next steps for targets and business decisions. Our advice for this month – keeping up to date with your business’s results and trends and staying informed on industry changes can help you make well-informed and strategic decisions.