You spent all this time gathering information for your CPA to do taxes. Income, Expenses, Capital Purchases, Depreciation, and every other detail your CPA wanted you to dig up. And then you paid Uncle Sam a nice chunk of money. Most people don’t want to look at financials any more for another year, but this is exactly when you should be delving into the nuts and bolts of your business to assess your strengths and weaknesses. What do all these numbers mean and where do you start?
When I am asked to look at the health of a business, I start with this list.
- EBITA – Earnings before Interest, Taxes, and Amortization. A look at how your efficient your business is without taxes or debt
- D/A – Debt to asset Ratio – how dependent upon debt is your business.
- ROA – Return on Assets – What percentage did you make on the total assets of your business
- ROI – Return on Investment – How much did you make on YOUR investment
- Owners hourly rate – often owners pay themselves a salary, but breaking it down to an hourly rate can give you a different perspective
- Cost of production per unit, compare to previous years. Are you making improvements in cost control of critical areas.
- Budget vs Actual – look for how accurate your plans were.
- Profit and Loss, compare previous years.
- Inventory Adjustments – make sure inventory purchases and use are not artificially inflating or deflating profit.
- Accrual vs Cash Profit and Loss comparisons- in particular, I am looking for big changes in AR and AP, Inventory values
- Profit and Loss, with percent of income and expenses. Look at the big expenses and see if small changes can make a big impact on the bottom line.
- Develop or tweak budgets – now is the time the numbers are fresh. Look at your plans for growth or cutting unprofitable areas of your business. Incorporate marketing plans with financial plans. Plan your profit levels.
- Balance Sheet – Look at changes in Net Worth
Ideally, you would be looking at these indicators on a quarterly or monthly basis. Minor adjustments to spending or income timing can have big impacts on your total tax bill. The trick is to know you need to make adjustments in the same tax year, not 3 months after.
It is a long list, and it takes time and thought to go through. But the payoffs are there. Don’t be intimidated by numbers!