Let’s start with some basics: there are three financial statements that are required to be published annually under Generally Accepted Accounting Principles. These statements are the Balance Sheet, the Income Statement, and the Statement of Cash Flows. The Income Statement is sometimes referred to under another name: the Profit and Loss Statement. This is because investors primarily care about whether revenues “less” expenses yield a profit or a loss. Investors don’t just enjoy dividends earned from profits—they also endure the financial liability of any losses the company takes. Therefore, they tend to like high gross margins and minimal expenses in order to get a high ROI.
High margins and low expenses translate into overpriced, low quality goods and services, which alienates customers. Therefore, your margin between gross revenue and net profit is often not as high as your investors would like to see. You must constantly re-convince your investors that your business provides value to them. The annual and quarterly statements you provide (particularly the income statement) are critical in “marketing” your company to your investors. This is where a consulting firm like AccountingMatters.com comes in. Such a firm can help you show your company in the best possible light.
Income Statement Analyzed
The Income Statement tells a story of how your company has changed throughout the year. Typically, income statements include two or more previous years along with the present year to show a company’s progress over time. The statement lists gross revenue and categorizes expenses so that the reader can see what the biggest costs are and now much gross revenue they eat up. Someone new to investing may be bothered by the large number of expenses that whittle gross revenue down to a much smaller net profit. To keep them investing, you need to communicate your value to them clearly, and your financial statements are crucial in communicating that value.
One of our specialties at AccountingMatters.com is to analyze all data and processes related to your financial statements, including the Income Statement. We perform a more thorough kind of profit-loss analysis called a Cost-Volume-Profit (CVP) analysis. This kind of analysis looks past the surface and takes a good look at how efficiently your business is really running. A CVP analysis either gives you a solid defense of your business processes or helps you see where you can improve those processes. With a healthy mix of accounting and marketing, a CVP analysis can help you portray your business to your investors in the best possible light.
How CVP Analyses Are Conducted
In CVP analyses, you begin by identifying your variable and fixed costs. Variable costs are closely related to your production volume, while fixed costs are more independent. You also have mixed costs that combine fixed and variable elements—these take a lot of training to find and analyze correctly. A series of simple equations enable you to graph these costs against your revenues. The math is not hard—identifying and gathering needed data is. Figuring out what you need to analyze and how to analyze it can be very difficult. A consulting firm like AccountingMatters.com brings you a fresh set of eyes to look over your business and find all the relevant costs for analysis.
With a CVP analysis, you must keep careful records of your production and sales volume in addition to related costs. Without finding your sales and volume in both of these areas, any analysis will be woefully inaccurate. You also need to add in your administrative and service costs for an accurate analysis—after all, those costs are also covered by your product sales. If your business provides services instead of physical products, these concepts remain the same. Either way, you need essentially the same information to determine whether your business is operating as efficiently as it can.
Upon gathering this data and running some equations, an analytical team can determine whether there are inefficiencies in your processes. Perhaps you are spending more time and money in overhead than you need to, or perhaps your production process does not use raw materials as efficiently as it could. The analysis team can provide clear recommendations for improvements that will increase your profit margins. This is where one of the biggest benefits of outside consultants like Accounting Matters comes in. They have seen many different businesses and have good baselines to measure yours from, which gives them an added advantage when giving you advice.
Presenting Analysis Results
To be useful to anyone, analysis results must be presented in a format that tells a story. Otherwise, only analysts can read them. The story is not only for you but for your investors as well. If you can clearly show why each cost on your Income Statement is there, you can appease even the naïve investor who doesn’t get it. A firm like AccountingMatters.com not only presents data as a story, but they also market it well to help investors see what is realistic in terms of profit margin. If the only way you can increase your profit is to alienate your customers (by lowering product quality or raising prices through the roof), then your profit is as high as it can get. Communicating this to your investors is essential to maintain their necessary support of your business.
The best way this story can be told is in a series of carefully designed graphs and concise, simple narrative. You want the reader to see, at a glance, where all of your revenue money goes and why it goes there. You want them to see that every cost is necessary for the successful operation of your business. (Or if not every cost is necessary, you want your managers and employees to clearly see what changes they must make to achieve maximum efficiency.) A firm like AccountingMatters.com can add an additional element you may not have time or resources to produce—a competitive analysis. If your investors can see that you are actually performing better than your competitors, they will definitely continue to invest in you. A brief document with some good, intuitive graphs will go a long way to effective communication with investors and employees about your company’s status.
Relation with Cost-Benefit Analysis
In our previous post, we talked about cost benefit analyses (CBAs). In truth, a CBA and a CVP analysis are highly related. However, CVP analyses focus specifically on monetary costs, while a CBA monetizes nonmonetary costs in order to get a bigger and broader picture of what your company faces. Having the same team of analysts perform both services for you can save you a lot of money because all the data gathered for a CVP analysis is required for a CBA. Can you perform your own in-house CVP analysis? Probably. But we can provide one for a better quality, and we can combine it with a CBA to decrease the costs of both to you. Both these services give you crucial information that will help you grow your business and make it as successful as possible.
Maximizing Your Financial Statements
Together with your other financial statements, the income statement is a critical part of your marketing message to your investors. Strong financial statements will help you keep your investors happy by explaining each expense and proving that your business is efficient. CVP-type profit-loss analyses help you to identify what improvements you can make to maximize efficiency and boost profits. They will also detect changes in volume that indicate increased or decreased customer satisfaction. With strong financial statements, you can truly show your company’s vitality to your investors and maintain their faith and support in your business.