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 Signs.com. marty@ferraricolor.com
14
http://www.Signs.com
Table of Contents for the Digital Edition of Big Picture - September 2015
Big Picture - September 2015
Contents
Insight
Wide Angle
Upfront
Business + Management
Brands to Believe in
Repackaging RIPs
The Writing’s on the Wall...and Paper ...and Acrylic.
R+D
Explorer
Big Picture - September 2015
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