Here’s how to turn a lengthy financial report into an executive financial summary
In my last blog I discussed the importance of lean month-to-month financial reporting. Now, I’ll tell you how to generate a lean and clean financial report.
Many CEOs wade through a lot of unnecessary financial detail that clutters their thinking and eats up time.
What the CEO really needs to see are sales figures and gross margins. They tell him or her the amount left over to cover the overhead and produce a profit for the owner.
The first metric a CEO needs to know is the average monthly overhead cost. The second is the percentage of that average monthly overhead compared to sales.
If the average monthly overhead-to-sales percentage is moving up, the company better be generating more sales to cover overhead, or know the reason why it‘s not. In short, if the numbers are moving in ways unfavorable to the company, the CEO can begin to identify the problem and take steps to address that issue.
The worksheet design can be tailored to the company using the spreadsheet’s capabilities. When working with a company, my discussions with its CEO and my analysis of current financial statements will help me shape this monthly financial report into a format easily understood by the CEO.
Moreover, I can walk him through the way I designed the worksheet and how I interpret its numbers. That will allow the company to create the same kind of worksheet, month by month and year by year. That CEO will sleep better at night, because he understands what he’s looking for when reviewing those month-to-month and year-to-year worksheets.
If you would like help replacing one-inch financial reports with easy-to-peruse month-to-month worksheets, please contact me. I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.
Here’s how to learn whether your company is trending positive or negative in key performance areas.
In my last blog, I told you about a family-owned business I counseled. The firm appeared to be doing well, but had no way of knowing whether its performance was trending positively or negatively. My assignment was to give company officers a means of gaining that insight, through the use of key performance indicators.
The company mentioned is a Web-based business that takes orders through the Web into its system. I first needed to learn how many product lines the company offered. Once I learned that, I identified three different measurements that we would need to help us gauge the cost of producing the revenues that flowed from those lines.
First, we had to determine the direct costs, or in other words, the cost of goods sold. Second, we had to determine the employee cost, split out including payroll tax and temporary help. Finally, we had to determine all other overhead.
Using the revenue from the product lines, we knew the consolidated revenue for the company. From that number we could calculate the average unit selling price. Next, I determined average unit cost for each of those three areas: direct, employee and overhead cost, and came up with total unit cost per period.
When we arrayed all the indicators, we had a lineup of direct costs per unit, summarized for the year. Those costs were clearly coming down. We then looked at the employee cost per unit, and compared that to the average selling price per unit, and that relationship was trending positively. The same was true when we compared overhead per unit with average selling price. We could also determine from those numbers what the unit gross profit was for the company.
Simply put, once we had the unit measurements in each area, we could plot and compare them period to period. Those plot lines revealed trends, and just as quickly, we knew the trends were positive. That knowledge made possible a discussion with management as to why those trends were occurring.
Whether your company is generating reports, offering consulting services, or selling gallons of oil, key performance indicators can determine important trends.
There is a way to measure the company’s performance using two ingredients: the number of employees on staff, and your output.
If you would like assistance in determining and tracking key performance indicators, please contact me. I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.
For those not inclined to be organized, the idea of doing your own accounting beyond balancing your checkbook may make you a little queasy. However, you’ve managed to keep your lunch this far, and guess what? You’re almost done! Over the past three weeks, we’ve discussed balance sheets, income statements, and cash flow statements; today, we will be discussing the linchpin that allows the financial statements to communicate in a clear and logical manner… the chart of accounts.
Week 4: Do You Have the Right Chart of Accounts?
Well if you don’t, then you should, and hopefully after this, you will. Your business life has the chance to become incredibly more coherent once you implement the right one. In layman’s terms, a chart of accounts (COA) is just that — a chart, made by you, listing each of your General Ledger account names that describe the nature of the account; all your financial transactions get recorded by coding the transaction following the COA . SmallBusiness.com refers to it as “an accounting term that describes a list of common ways money is used by a business so that its owners and managers can organize revenues, costs, and assets into categories.” It is, for any business, an invaluable tool. Remember, the coherency of financial statements is all in the coding.
Below is a basic format for setting up the COA.
|Income Tax Expense||900-999||9000-9999|
The 3-digit coding can accommodate two product lines; if you have more than two, use 4-digit coding which considerably expands the coding universe. Please note that service lines may be substituted for product lines.
Direct Costs may be defined as costs directly associated with the cost to manufacture, warehouse, distribute, deliver, or to consult, for a “line of business”. Direct Costs exclude selling, general and administrative expenses. These are Operating Expenses, or Overhead.
A chart of accounts is made to be adaptable to each business’ unique needs, so go ahead and tailor it! This is a system made to make your life and the running of your business easier, not to add more stress. Keep it simple. That is the best way to keep it focused, and keeping yourself focused means that you allow yourself more time to explore opportunities that will grow your business profitably by having coherent financial statements.