How to analyze financial reports to make informed decisions

So you might be asking yourself, why did we just do all of that? Seems like a lot of effort for just a couple of reports.

Well here’s the answer.

You cannot make good business decisions without good information. With these two reports, we now have accurate, well prepared, easy to understand financial information about our little bakery. Here’s what we now know:

1. How much we sell

2. How much we spend

3. What we spend it on

4. How much profit we make

5. How much our assets are worth

6. How much we owe other people

7. How much the business owes us

Now, imagine next year when we prepare our next set of financial reports. Then we’ll also know

8. If our profit is increasing

9. If our expenses are increasing

10. If our asset values are increasing

11. What we’re spending more money on

12. What we’re spending less money on

13. If our debt is increasing

14. If the business is improving in terms of higher sales, higher profits and higher net worth

This is the whole reason we prepare financial information - to pinpoint the strengths and weaknesses in our business and see where we can improve. Every year corporations spend millions of dollars on accountants and consultants, seeking advice on how to improve their profits. And can you guess what these accountants and consultants use to base their advice on? Financial statements!

For a well-educated professional, a set of financial statements can tell them an incredible amount of information about a business. Just a profit and loss statement and a balance sheet is enough to generate an abundance of suggestions and ideas. Right now, I’m going to pretend to be a consultant for your bakery. Let’s see what I can come up with.

Financial Analysis

PROFIT AND LOSS STATEMENT FOR (NAME)’S BAKERY FOR THE PERIOD ENDED (TODAYS DATE)
Revenue
Sales	$7,000
Total Revenue		$7,000
Less: Expenses
Cake mix expense	$3,000
Telephone expense	$300
Repairs expense	$50
Interest expense	$1,000
Depreciation expense	$400
Total Expenses		$4,750
Net Profit		$2,250
Less taxation (30%)		$675
Net profit after tax		$1,575

BALANCE SHEET FOR (NAME)’S BAKERY AS AT (TODAYS DATE)
Assets			Liabilities
Bank	$21,650		Loan	$9,000
Computer	$1,500		John’s Car Shop	$3,000
Oven	$2,000		Taxation Payable	$675
iPhone	$500
Car less accumulated depreciation	$2,600
Total Assets		$28,250	Total Liabilities		$12,675
			Owner’s Equity
			Owner’s Equity at start of year	$15,000
			Minus: Drawings	$1,000
			Plus: Net Profit After Tax	$1,575
			Owner’s Equity at year end		$15,575
Total		$28,250	Total		$28,250

Observation 1:
Enter the Account with Largest Expense

Observation 2:
Do you see advertising expense?YesNo

Observation 3:
Do you see any  wages?YesNo

Observation 4:
How much money is in bank ?

Observation 5:

Do you see rent expense ?Yes No

Observation 6:
What is the car worth after depreciation?

Now, some of these suggestions may be worthwhile and some of them may not, but that is beside the point. The lesson here is, from just looking at a profit and loss and a balance sheet - two reports which fit on one piece of paper, you can derive such a wealth of information about your business. Not only can you ascertain exactly where your money is coming from and going to, you also have enough information to make a decent list of ideas and suggestions about areas of concern and improvement. Now just imagine what an effective consultant could come up with for a large corporate like Toyota or McDonald's, armed with a few more pages of financial information.

The key to good decision making is good information – that’s what accounting is all about!