Reviewing Financial Statements: Putting The Numbers In Context

When I present a financial statement to my clients, one of their first questions (after “Where did all of the cash go?”) is, “Is this good?” They want to know if their individual result—their bottom line, or margin as a percentage of revenue, or top-line revenue growth—is good in comparison with everyone else. Once they see that their revenue has grown or their bottom line is a positive number, they want to put that number in context. 

Here’s the problem.  There are very few businesses exactly like yours. As soon as you start trying to benchmark results across companies, geographies, and industries you start running into unique differences.  What’s worse, the less favorable the comparison between your numbers and the “benchmark” is, the more likely you will be to find reasons to explain or justify the difference.  While a comparison exercise and the resulting discussion can be informative, a straight comparison to someone else’s empirical results (particularly when the calculations are not standardized) can be more frustrating than insightful.  

The best benchmark: your goals.  Rather than comparing your results to any other company, compare them against your own goals.  Pull out your five-year plan. Are you on track?  Then look at your current year budget.  Did you plan well? Where did you miss the mark?   

Consider these questions: 

• Were you on track with revenue growth?  

• Did you expect your operating expenses to be XX% of your total revenues?  

• How did your revenue growth compare with your growth in Accounts Receivable? If AR grew by a higher percentage than sales, you might have a collection problem.  

• If sales of one product or service failed to hit your goal, how will your marketing strategies need to change?  

• Is your best customer still accountable for XX% of your revenues? How much profit do they represent? 

• Are you building equity in your business? 

Rather than looking to external indicators as a measure of your own success, look inside: Evaluate your results again your personal goals. Be sure to consider not only financial measures, but your deeper, more personal goals, like building a legacy, spending more time with family, or funding retirement.  If you find yourself coming up short year after year, it is time to either seek outside assistance or consider modifying your plan, at least in the short term.