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Track your business performance with reports

Rhys Roberts - Wednesday, May 26, 2010

Does it ever seem like the only reason you keep accounts is because the ATO make you?  How about using your accounting information so YOU can see how your business is performing?  It’s really not that difficult to do, and like anything else it gets easier with practice – so let’s start with a few basics.

There are a whole range of reports you can run from your accounting software that will give you important information relating to the performance of you business (and this post assumes you know which reports you want to run, but if you don't we can provide help with that).  Once you have run your reports how do you interpret that information?  How do you know if the figures in the report are "good" or "bad"?

Well there are basically three ways to measure an accounting report: you can measure it against a previous period, you can compare it to a budget, or you can measure it against other similar businesses.  Let’s take a look at these three options in a bit more detail.

Compare to another period:  This is the easiest way to measure your results – you just run the report (for instance a P&L) and select to compare this period to earlier ones (last month, or the same month last year). 

Review the report to see if your results getting better or worse?  Often putting the summary figures into a graph will help as a graph will reveal any trends really clearly.

And identifying the areas that are not trending the way you would like will tell you where to focus your attention to try to improve performance.

But a prior period report isn’t always enough.  What if last year you had an exceptional “one-off” year, and this year you’re still doing well, just not quite as well.  Is the downward trend “bad”?  Or what if your business (or the market you are operating in) is changing?  Then making year on year comparisons is harder.  One of the answers then might be to use a budget.

Compare to Budget:  To do this you will need to sit down and work out a budget – this doesn’t need to be very sophisticated, it is really just a financial plan (but if you’ve not prepared one before it can be pretty daunting, so if you need help on this please contact Viridity).

Armed with your budget you can report your figures with the budget as the comparison.  You can investigate any differences (or variances as they are sometimes called) – and more importantly you can decide what to do in response.  If you make a habit of doing this every month you will be in far greater control of your business than if you wait for your accountant to tell you your profit figure at the end of the year.

Even a budget may not be a complete answer – maybe you are being unrealistic in setting the budget targets, maybe you could be doing much better.

Comparison to Other (similar) businesses – or “benchmarking”:  Comparing your business to others can be a great way to measure how you are performing, as you now do get an “objective” yardstick. 

There are companies that sell this information, and it is relatively inexpensive, but if your business is too small to justify the expense there is a free alternative.  The ATO recently released performance benchmarks for 50 different types of business, and you can use this information to measure how your business is performing.  From the many thousands of tax returns lodged with the ATO they are able to assess the “normal” ranges of ratios to sales of cost of goods sold, labour and rent and other expenses.  You can use this data to compare to your business.  You can access the ATO data here. 

One further tool that this post doesn’t cover is using “ratios” to help with interpreting the figures.  So when you have run your report, against whatever comparative you are using, how do you might still need some additional help to spot what is good and what is not.  That is where ratios come in.  But that is also a topic for another post.

If you would like assistance implementing or interpreting your reporting please contact Viridity.

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