April 26, 2006

So you’ve just received your 2005 financial statements and are now wondering what to do with them. If you are like many business owners, you don’t have the time to review these statements with the detail required to fully understand your company’s financial performance. More often than not, business owners give the statements a quick scan and then file them away without thinking about them again until the bank requests a copy.

But your financial statements can tell you a lot about the success of your company during the previous year: How well are you managing your assets? How strong are your liquidity levels? What does your capital structure look like? Has profitability improved in the business?

“Combined with industry research and trends, your financial statements are a gold mine of opportunity,” said Dustin Hostetler, senior financial analyst in Rea’s Wooster office. According to Hostetler, strong financial analysis is what separates the industry leaders from the rest of the pack. The following are three ways to utilize your financial statements and better understand your business.

Benchmarking

You can use an industry benchmarking source such as Risk Management Association (RMA) to compare your performance to industry standards. Benchmarking is useful to compare your results to the industry competitors and identify performance gaps. “Even if profitability is improving in your own business, the industry may have grown profits at a greater rate,” said Hostetler. “So even though at a glance, you are profitable, you may actually be lagging behind the competition.” Without benchmarking, you run the risk of making important decisions based on inaccurate assumptions. Maybe the industry is maintaining a lower cost structure, or perhaps they are raising prices to levels still accepted by consumers, but either way you need to know where you stand to remain competitive. “What you do with the knowledge gained from benchmarking is just as important as the benchmarking practice itself,” said Hostetler. “If you fail to take action based on industry trends, you may miss a good opportunity to improve your business.”

Financial Analysis

ProfitCents is a financial analysis program that is used to analyze and score various areas of financial and operating performance. This program analyzes trends in the business and highlights areas for improvement. “The program is a good start for analyzing the financial performance of your business,” said Hostetler, “but further analysis may be required to fully understand the reasons behind trends. Similar to benchmarking, the practice of financial analysis only serves its purpose if action is taken based on the results and findings.”

Industry Research

Industry research programs like First Research are available to keep up to date on industry trends and opportunities. It is especially useful if you can identify how industry-related trends may be impacting your business. Perhaps you have performed financial analysis of your cost of goods and have noticed material costs have been trending upward. If you didn’t conduct industry research, this might have been a concern of yours. However, further research may show that material costs have been rising across the entire industry for the last several quarters. Or maybe you want to know what the forecasted growth rate is for your industry over the next several years. Industry research will provide these answers to better enable you to plan your business’ future.

“Products like RMA benchmarking, ProfitCents and First Research are valuable resources we offer our clients,” said Hostetler. “We have processes set up to efficiently produce these reports and to do the analysis that will save our clients time and money in the long run,” he said. “Plus, we can interpret the financials to provide valuable business advice.”

When all three of these financial statement analysis techniques are used together, you end up with a wealth of knowledge that can be used to lead strategic planning initiatives in the years ahead. You can make strong business decisions that are based on solid evidence as opposed to gut feelings or educated guesses. Performance gaps with the industry can be turned into opportunities. The famous line “You can’t manage what you can’t measure” won’t apply to your company.