I’m a finance professional but would be the first to admit the possibility that numbers can be meaningless and maybe boring. Numbers should be able to give you essential (and interesting) information about your business. The crucial issue is context. So if you’ve ever looked at accounting information and thought ‘so what?’ you are not alone.
The number is 50,000!
??? (yawn/blank look)
It’s Acorn Ltd’s profit for the year!
Is that good?
Acorn had sales in the year of £20 million.
Not sounding so good?
Last year Acorn Ltd had a flood at its main premises and made a loss for that year of £1 million.
Forecast loss for this year was £200,000
Not sounding so bad?
Most other companies in the same industry made losses in the year.
Now sounding like a better result?
By drilling down to the figures in the context of what you know about the business and comparing to previous periods, budgets and forecasts, you obtain information not just about how the business has performed but indications of relevant action points for the future.
And so we get to the story
Acorn made £250k more than forecast. Because:-
- Sales had increased by £500K. This was due partly to new sales generated by the newly recruited sales manager. Customer feedback also suggests that Acorn products are considered more reliable than competitors.
- Product costs had increased by £200k. This was due to the price increase of a component. Engineering consider that this component is of superior quality and more reliable than components used by rivals.
- Sales manager’s salary was £10k more than planned due to a bonus paid because of sales generation beyond target.
- Planned training and recruitment costs of £40k had been postponed for 3 months.
- Management were preparing to switch to a cheaper component but since the more expensive products provides a competitive advantage will retain. Consider sales pricing increase to compensate for increased cost.
- Sales Manager was on a temporary contract and will now be offered a permanent contract.
- Budget for the additional £40k costs which will occur in the next period.
For your business figures to be useful they need to have context. This can be provided by comparing your figures to others in the business (benchmark), previous periods performance, or/and expectations (budgets or forecasts). Although this comparison may in itself provide some interest, in order to be meaningful for directing the business you should also be able to further analyse the figures so as to understand the business detail and respond to the information consequently obtained.