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Financial Statement points of reference

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Important: Always consult an accountant before making or delaying any decisions.

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There are two categories of reference when assessing the financial results of a business: internal or external.

Internal points of reference

These relate to the internal objectives and requirements of your business. In other words: how your business is performing given the situation you have created.

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1. Commercial requirements and objectives

Your requirements will dictate and investors will expect at least a minimum level of performance in terms of revenue and control of costs.

Typical examples:

1. All elements of Income Statement to confirm success or failure of current business strategy and efforts.
2. Sales Revenue to meet business plan and investor expectations.
3. Minimum profit requirements to meet cost obligations.
4. Minimum profit requirements to meet investor expectations.
5. Expected profit to meet business plan objectives.
6. Cost control to meet business plan expectations.

Typical points of reference sources:

1. Historical Financial Statements.
2. Current published Financial Statements.
3. Current Business Plan.
4. Cost obligations.
5. Investor, loan and bank expectation reports and agreements.

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2. Previous periods of performance

Comparing your current Financial Statements to previous Statements will indicate progress or regression.

It is essential to identify changes and write down why these changes have occurred and what your next actions are to progress those positive aspects and to find solutions to issues.

Typical points of reference sources:

1. Historical Financial Statements.
2. Current published Financial Statements.

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3. Actual Financial Statements compared to that forecasted

It is important to produce a forecast set of Financial Statements based on your business plan. Your published Financial Statements can then be compared against those expectations.

Assumptions and the quality of information on which you based your forecast is therefore tested and you can either confirm the quality of your predictions, take appropriate action or evolve a new forecast for the next periods.

Typical points of reference sources:

1. Previous forecasted Financial Statements and objectives.
2. Historical Financial Statements.
3. Current published Financial Statements.

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4. Referencing between Financial Statements

Example:

Income Statement profitability compared with the resources required on the Balance Sheet to achieve that profit.

The Income Statement may show the business has increased its profit but it does not indicate the amount of business resources that was required to do this. For this we need to look at the Balance Sheet.

Typical points of reference sources:

1. Published Balance Sheet.
2. Published Income Statement.
3. Published Cashflow Statement.

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External points of references

These provide a perspective on how well you are doing compared to the outside world.

1. Similar businesses in your sector

This could simply be businesses that do the same as you but not necessarily compete.

Example:

You run a coffee shop in London and the comparison could be a coffee shop in Bolton. This would provide two levels of insight that require interpretation.

The first is an intrinsic comparison. This is a simple comparison of your business against other similar businesses and how well that other coffee shop manages cost of sales, expenses and generation of revenue.

The second is an extrinsic or wider assessment. This considers cost issues and revenue opportunities from the perspective of the environment within which that other business operates. The coffee shop in Bolton may enjoy being in a busier shopping precinct but lower rent costs. This will be reflected in its revenue and rent ratio when compared to your Income Statement.

More generally, businesses of similar size and age in your sector could provide further clarification on how well you are doing and potential opportunities or insights for improvement.

Typical points of reference sources:

1. Bank.
2. Business federations.
3. Industry bodies.
4. Public companies published results.
5. Companies House published results.

2. Industry averages

Comparing your results against particular industry averages will enlighten you as to how well you are doing in relation to other businesses that face similar logistical, cost and market restrictions and opportunities.

After all, knowing where others are in the race around you is crucial to giving you perspective.

Typical points of reference sources:

1. Bank industry reports and ratios.
2. Business federations.
3. Industry bodies.

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3. Competition

Measuring the performance of your business against that of competition and particular competitors will provide insight as to the extent of competitor advantage that exists either in your favour or that of your competition.

Your set of Financial Statements is therefore the sum total of your success against the competition for that period of time.

Example:

The results of competitor pricing strategies such as premium pricing or even a price war will be starkly exposed in the Income Statement. A competitor that has reduced prices and costs with the result of increased revenue and therefore profit will indicate a successful market positioning strategy that you can either move away from with your own premium positioning; therefore offering distinct choice in the marketplace; or chase after. Embarking on a game of musical chairs by wrestling for the same seat in the market means you may have to seriously review your operation and marketing strategy.

Typical points of reference sources:

1. Business federations.
2. Industry bodies.
3. Public companies published results.
4. Companies House published results.