We all comparison shop. At the grocery store, I spent an inordinate amount of time comparing brands by reading the label, checking the prices. I even have a subscription to Consumer Reports for big purchases. I use travel sites that compare travel deals when I go on vacation. We even make comparisons when we are dating!
Life is FULL of opportunities to compare one option to another. It’s how we gain perspective.
The same is true when you are reviewing your financial statements.
When you are reviewing your financial statements, you should be comparing them to other numbers. It’s how you will gain perspective about the results! Don’t review them in a vacuum. For example, a financial statement showing net income of $100,000 might look great on its own. However, if the average net income for your industry is $500,000, then as a reader of the financial statements, you wouldn’t know the financial statement results were poor without that additional perspective.
So here are a few suggestions of comparisons you can make on your financial statements to give your numbers more meaning.
Compare to previous year
This is a common comparison. Line up your current year numbers and compare them to how you performed the previous year. You could even go further and compare to more than one year. Look for trends such as increasing or decreasing revenue or expense categories. Can you pinpoint what actions your company has taken to justify the increase or decrease? If you see a negative trend, what actions are you going to implement to turn the trend around?
Compare to budget
This comparison is not as common because it takes a lot of effort and thought to setup a budget in the first place. However, comparing current year results to budget is an excellent task because it helps keep you honest in reviewing your results for the year. If you take your current year numbers and compare them to budget, it allows you to review an honest assessment of your prediction of the year’s results versus your actual results. For example, if you budgeted $100,000 of salary expense but you incurred $120,000, you can analyze why. Did sales increase and require more staff? Did you review your staff and decide to give unbudgeted raises? Or is this a reality check that your staff is inefficient and that you need to make personnel changes? Comparing real results to budget will assist you in monitoring the progression towards your business goals and to facilitate change.
Compare to industry standards
What is unique about this comparison is that the standards aren’t created by you, they are created by the industry! Comparing your financial statements numbers to outside industry numbers can help you identify trends that you normally wouldn’t see. For instance, if your sales has decreased while the industry is increasing, you can analyze why and dig deeper. Are you sacrificing sales for a work/life balance? Is there a problem with your location? Are there services being offered in your industry that you aren’t offering? Using industry standards as a comparison tool can bring an outside view to your numbers.
A final warning
There are two landmines you must avoid when making comparisons. The first one is obvious that you must have accurate financial statements to begin with to make comparisons to other periods or to budget. Comparing bad numbers to other bad numbers will get you nowhere.
Also, make sure your goals and growth are well defined and represented in your budget. Many businesses just use the prior year financials to create the budget for the next year. Comparing mediocre financial statement results to budget encourages more mediocrity. The same goes for comparing current year to previous year.
You can turn your time spent reviewing financial statements into productive time by adding figures for comparison.