“Every number on the financial statements tell a story” my first accounting mentor used to say this. You don’t even have to think about it that long and you can see that there is a truth in his statement. I think we can go further and say that not only they tell a story they also tell story about the habits and routine of your company. The comparative financial statements review is the best place to start finding out about this story. I suggest that you transfer the data into a spreadsheet, create a formula to determine the ratios and analyse them. Some accounting software cloud or desktop such Xero and QuickBooks have these features built into them plus they will give you the changes in terms of ratios. Nevertheless, sometimes by just looking at the numbers for a while they will give you some ideas. once you figure out the advantages and disadvantages through these ratios you will have a great idea where to focus your attention.
I’ll provide you some examples:
Year 1 Year 2 % Change (formula = Year 1/(year 2 -year 1)
Utilities 1,200 2,300 109%
So what do you do? right, 1st look into the details of that account. Are the expenses utility related? if yes, good, if no, fix … let’s say utilities related. Questions you may ask,
Did the utility rates went up?
Was it colder or warmer year, if so, is this increase normal?
Is your air condition working probably. Let’s say no. Through your numbers, you came up with a solution.
Follow this practice for every account where there is a significant change. Chances are you will discover some interesting clues that are worth looking into.
This is what I mean when I say the numbers tell a story. You can even do a few of the numbers together. For example, compare and analyse sales, cost of good sold (CGS), purchases and wages at the same time. logically, when sales go up, CGS, purchases, wages should go up as well. Wouldn’t you be surprised if that didn’t happen? Sometimes it does, some of your employees may end up selling more services. You know what, we should find that employee and give him a raise. Sometime your managers may save some money by ordering bulk, hence sales went up, cost wen down. Bingo! This is amazing, so this practice, looking at the “comparatives” is one of the best analytical tool available.
Have you seen the financial statements of the companies who are publicly traded, you can buy and sell their shares on stock market. well, if you didn’t you can look them up. Which is pretty amazing, I mean you can look at Apples financial statements or GM, Ford, cool, right? well those statements are produced in a comparative format. Start analysing them and you see even more interesting stories. Basically our hard work, smart work, ideas, creativities … will some how show up and be reflected on the financial statements, and the ratios, and great follow up questions will tell a lot of stories.
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