The 4 Things You Should Look for in Your Annual Reports
Of all the tasks business owners take responsibility for at the beginning of the year, reviewing your annual reports can be the most beneficial to your business. Reviewing your reports during this time can help you assess what went right in the previous year and what you need to improve on in the upcoming year.
The most basic reports you should be reviewing are your balance sheet, income statement, and cash flow statement.
In this article, we will be looking at the 4 factors you should consider when reviewing your annual reports. While it is important for any business owner to know this information, what is really important is the decisions you make after.
Annual Comparisons
With any accounting software, you can compare one fiscal year to the prior but January is always an excellent time to pause and look at your data. When reviewing reports don't just look at the prior year, compare with 2, 3, or even 4 years prior.
What you want to look for is trends in the data. Do you notice you were making more money during the winter months? Maybe you noticed your income fluctuated in year two. Once you notice these trends, consider the events that may have happened during this time.
Did you release a new product? Did you increase or decrease your prices? Make note of these fluctuations and why you believe they occurred. Discuss the results with your accountant and any other managers who may be part of the decision-making process.
If you have marketing data. This could also be a good opportunity to compare the two. Consider things like website views, Social media followers, consultations, or sales inquiries.
2. In The Red
At the beginning of the prior year, you likely developed a budget. Line by line, review what you under and overspent on. For items that are in the red, consider whether the amount you overspent on is material. Did you overspend a relatively small amount? If not, you want to look into why this occurred.
Was something off with your assumptions or calculations when you developed your budget? It may also be fairly innocent or unexpected. Maybe you overspent on office supplies because you needed anti-bacterial wipes when the pandemic hit.
You may be in the red because something went wrong. Did you struggle to meet your sales goal? Did you have a little bit too much fun with your wallet at the company excursion?
Consider these outliers when establishing your budget for the upcoming year.
3. Security
In the years since the pandemic, we've learned how quickly things can go wrong. While it is important to establish an emergency fund there are other ways to prepare. When reviewing your annual reports consider things like client turnover. Consider how many clients or sales you need to maintain to keep up with payroll. Do you have enough funds for a three-month emergency savings?
When reviewing your annual reports consider all worst-case scenarios. How does your business stack up? If you have a bad season are you able to maintain operations until things improve? What can you cut back on if things were to go wrong?
Ask yourself these questions and make your business even stronger this year.
4. Financial Ratios
Financial ratios help us understand at a higher level how our business is operating. There are many financial ratios you can consider but some important ones are your working capital ratio, your quick ratio, and relevant turnover ratios.
Your working capital ratio considers your current liabilities and current assets. It looks at whether your current liabilities could easily be paid off by your current assets. This helps business owners understand the financial stance of your business and plays into the security mentioned in point #3.
Working Capital Ratio:
Working Capital = Current Assets / Current Liabilities
The quick ratio considers what you need to do if you were in quick need of cash. This does not include things like inventory. Instead, it considers more liquid assets, like cash and accounts receivable.
Quick Ratio:
Quick Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities
Turnover is a fairly general term so apply it to whatever is relevant in your business or industry. Turnover can relate to employee turnover or inventory turnover. Employee turnover can be expensive for businesses due to the HR expenses of hiring and the staff expenses of training the new employee. Inventory turnover can also cost a business money by having inventory on the shelf for too long. Consider the turnover ratio is as it relates to your business.
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The start of a new year is an exciting time for business owners. We think about the possibilities of the future, our new goals, and how we're gonna do things better. However, this cannot be done if we ignore what happened in the prior year. And the best way to assess what happened in the prior year is with your annual reports.
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