Looking Back At Your Finances To Look Forward

Putting data from your firm into context will give figures more meaning and allow you to spot potential flaws and problems with current operations.

Making a profit is the goal of most businesses, but the road to success can be rocky and full of ups and downs. Being in charge of running a company - both large and small - is usually a stressful experience as you weather recessions while attempting to stick to your financial plan.

At the end of the tax year, there a several ways you are able to look back at the previous 12 months in order to push your business forward and reduce the likelihood of problems occurring as you continue to trade. Accountants are available to help guide you through this process and described below are some of the commonest ways of analysing your financial performance.

Making a statement

Paperwork generated by your company's essential figures is not only for the taxman. You are legally obliged to submit records for the purposes of tax and national insurance. Instead of filing away certain forms, you're advised to take a good look at the information they contain, as it will help to direct your firm to success. Statements will be packed with data that reflect the wealth of your company thanks to details about your assets and liabilities - which are located on balance sheets.

You're also free to dig a little deeper and check out your spending on inventories, and whether you have too much stock left at the end of the year, indicating you could benefit from promotions or pushing certain goods. Accounts receivable is money owed to you from clients and is a good indicator of how effective your organisation is at pulling in payments.

Subtract, divide and conquer

You don't have to have a head for figures in order to be able to make sense of the data generated by your company. You just need to see it in a particular context, which is where business ratios come in. These are used to compare and contrast different elements of balance sheets and information held on other statements. They are a common way of attracting investment as they are able reflect the financial health of your organisation.

Broadly speaking there are ratios that look at the liquidity, efficiency, profitability and solvency of your firm. So if you were concerned that your stock levels were having a negative impact on your profits, you are free to perform an Inventory to Sales ratio, which falls in the efficiency category. The figures produced would compare the amount of stock you bought and the level of sales in a one-month period.

Profits and costs

Costs are a drain on your profits and they can be broken down into two main types: fixed and variable, although some may be considered a combination of both categories. You are able to take these two figures and come up with lots of indicators on your company's financial performance. Fixed costs reflect their name, in that they feature outgoings that don't really change, such as rent paid on organisation buildings, insurance and utility bills.

On the other hand variable costs do exactly that - they change with each sale. Variable costs could include delivery charges and sale commissions for example. If you were to take your profit and takeaway the variable costs, you'd be left with a 'contribution margin' - which can be used to compare how much wealth individual services you offer bring in. Operating leverage is another useful calculation that looks at the role of fixed costs in your business and the impact that they can have on your profit and losses.