Let’s talk about data. Data can be broken out into three areas: that which represents the past, the present, and the future. Today we’re going to talk about the value of past data. In the next two vlog posts, we’ll look at the present and future because we need to understand our data in each of these areas.
The Value of Historical Data
When we look at data from the past, we’re really looking at financial statements because financial statements are historical. They tell us where we’ve been, not where we are. The income statement is the one that most business owners spend some time looking at, but they don’t always understand what they’re looking for.
I’m just going to give you three quick keys to analyzing past income statements: sales, gross profit percentage and expenses.
Sales & Expenses
Sales is something you’re always going to be measuring against what you were forecasting for the year to make sure that you’re on track. Are you doing a little bit better than last year? Are you doing what’s expected or not?
Expenses are another number that we look at. When I break expenses apart from cost of goods sold, expenses are those fixed costs that you have. They’re pretty much the same from month to month. Your cost of goods sold varies with the amount of sales. If you have a lot of sales, you’re going have more cost of goods sold. If you have very few sales, you’re going to have very little cost of goods sold.
There is a relationship that goes on there! And there’s a percentage we’ll look at here as well. So think about expenses. If they’re supposed to be about the same every month, you should be able to look at your financial statements and say we’re all spending about the same amount of money every month on our expenses. If all of a sudden the number jumps one month, you know to look into why that happened.
When you’re looking for that consistency in your expenses from month to month, it’ll identify whether or not there’s a problem that happened there. It doesn’t mean that the problem is a bad thing. Perhaps you had three payrolls one month rather than two as normal. Well, that would explain why there was a variance. But sometimes that identifies things that weren’t expected and allows you to drill in and get an idea as to what the issue might be. Keep it simple. You want to look at sales versus your projections. You want to look at expenses and make sure there’s a consistency from month to month.
Gross Profit Percentage
Then you want to look at gross profit percentage. The reason we look at it as a percentage is because your cost of goods sold numbers are directly related to your sales. If you have more sales, you have more cost of goods sold. If you have less sales, you have less cost of goods sold.
So there’s a ratio there, a percentage if you will. Perhaps in your business, your cost of goods sold is 60% of sales which means 40% of it is gross profit, the profit left over before paying your expenses. If that number is 40% in your business, then again, when you look at it from month to month, you should see roughly plus or minus just a little from 40% from month to month. If you see that number trending the wrong way or the right way, you’ll want to stop and figure out why that happened.
If your cost of goods sold is slowly going up and your gross profit percentage is slowly going down, you’ll want to deal with that right away because that can be extraordinarily detrimental to your business.
Put Your Knowledge to Work
In review, historical financial statements give you a way to look at three key numbers: sales, gross profit percentage and expenses. This simple approach allows you to look at the numbers very quickly and determine whether or not there’s an issue within your business.
As soon as you know that there’s an issue, then you can drill down and find where the issue is. Or if you don’t understand how to get there, you can talk to your controller, bookkeeper or CPA, whoever you’ve got in your life that might be more astute at those numbers than you are. They can really help you to do that if you need the help. So think of historical financial statements and data from the past as a diagnostic tool for identifying an issue.
Keep it simple. Make it useful. And actually, take a look at them every month.
In the next vlog, we’ll take a look at the data we need to pay attention to in the present. Thanks so much for visiting and feel free to check out my other videos for more ideas on how to break through and reach the next level in your business. And, if you like this video, please subscribe.