Big Picture - September 2015 - (Page 14)

business + management Analyzing the Income Statement These details will help you make better business decisions. | by Marty McGhie U BIG PICTURE September 2015 ndoubtedly, every business in America reviews their sales at some level. But are you getting the most out of your sales analysis, or is it a mundane process? Let's examine your income statement and cover some approaches to evaluating your key accounts, and how you might look at your sales results differently. Monthly Comparisons - Many companies look at their monthly sales in comparison to the prior month to determine trends. While that measurement can be a valuable indication of where your business might be heading, it likely doesn't tell the whole story. One idea is to include a comparison of the same month in the prior year. This eliminates the bias of seasonality that we all deal with from month to month. Comparing month to month, quarter to quarter, and year to year with a "current year vs. prior year" approach provides you, as a manager, with a more accurate view of where your sales are heading. Sales Growth - Another helpful tool you can easily create is a trailing 12-month spreadsheet detailing your sales growth from month to month over the past year. This provides you with an instant snapshot of the most relevant months of your business - the past 12. This tool also ignores the shortage of data when only using fiscal year analysis. For example, if you are reviewing sales in January or February of a fiscal year, analyzing your sales for the year would only include one or two months' worth of data. But if you review the past 12 months, the information will be much more useful. direct labor, and production overhead. Direct materials and direct labor are areas where managers can exercise significant control if they understand them. For example, if you are selling $1 million per month in product and you figure out a way to reduce your percentage of direct materials to sales by 3 percent, you have just sent $30,000 to the bottom line. However, if you wish to manage direct materials or direct labor, you must measure them regularly. And the most effective way to measure them is to get into the details of the costs. When reviewing direct materials, your accounting and inventory systems must provide you with detail of individual materials consumed in the production cycle. Multiple variables affect the costs of direct materials. Shop redos, the amount of wasted materials, overall material usage on jobs, and, of course, pricing, all factor into your overall costs and corresponding margins. Spend the necessary time to drill down into your material costs. As a result, you will gain a depth of information to help you manage your direct material costs. Direct labor is also a very important expense to your business. Every accounting professor teaches that direct labor is a variable cost. As sales increase, your labor costs will increase proportionally. If sales go down, then you can cut labor costs to accommodate the lower sales for that period. But that's just not true. In our industry, as well as many others, DOWN TO THE DETAILS As we work our way down the income statement, the next significant item is the cost of sales. Although there are several different interpretations of what constitutes the cost of sales, for our purposes, I'll assume this includes direct materials, MARTY MCGHIE is VP finance/operations of Ferrari Color, a digitalimaging center in Salt Lake City, San Francisco, and Sacramento. He is a partner and director of 14

Table of Contents for the Digital Edition of Big Picture - September 2015

Big Picture - September 2015
Wide Angle
Business + Management
Brands to Believe in
Repackaging RIPs
The Writing’s on the Wall...and Paper ...and Acrylic.

Big Picture - September 2015