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5 Savvy Business Tips to Gain Momentum in Your Business

Getting new clients and gaining momentum in your business is probably one of the easiest things to do and you just need to think in a different way. You need to be willing to do what 99% of your competition is unwilling to do. Here are 5 ways to to get more clients and gain momentum in your business:

Business Tip 1. Referral Systems are a Gold Vein of Opportunity.

Are you missing out on this gold vein of opportunity? Let’s take a look at the 4 reasons you want at least one referral system into place: 1) this one marketing strategy will give you a client that will buy more often; 2) they will buy for a longer period of time; 3) they will also buy a higher quality of product or service; 4) and they will buy a higher quantity of product or service; once your system is in place you spend less time on getting clients. Here are two real world examples and the impact referrals can have on your business growth.

I had been brought into a company that was experiencing a slump in their sales. And what did I find? No referral system. We introduced one system and brought sales up. Then we introduced two more referral systems for a total of three systems and brought sales up again. What’s the bottom line? This company experienced a sales increase over $19,000,000 (a 42% increase in business) in a very short 10 months!

One of my Platinum VIP Clients was experiencing a slump in her sales. After looking at her business I saw and opportunity for an amazing referral program that would create exponential sales explosion! When we discussed it, her eyes popped. Why? Because she figured without getting any new clients she was sitting on three quarters of a million dollars that she could tap into right away. The truth you just have to know where to look for the money.

Business Tip 2. Front Load Your Sales.

It is amazing! I am finding what has worked in one industry works in many other industries. I found this little secret out when I was in charge of marketing for a small new home builder. Let me share the secret with you…

When we were getting ready to release a new home community for sale, we would have the construction of the product well underway, set a sales date, put up a sign, have the doors open for giving out information and start gathering names and loan applications.

On the day we had the first sale, we would offer a limited number of homes for sale at an irresistible price (this is before they’re even ready for occupancy). You are able to do this, too!

When you are offering a teleclass or launching a new product or service, start early and build interest and momentum in your product or service, create urgency and offer it at a HIGHLY irresistible price.

Business Tip 3. Align With Your Congruency Factor and Dance to the Beat of Your Own Drum.

At my Pathways to Your Profitable Purpose workshop, I shared a story about Paddy Lund. Paddy is a dentist and when he went into practice he looked around to see how other dentists marketed their practice and he followed suit. In a moment you will see why this is a bad idea.

Paddy ended up with $65,000 annual revenues, working long hours and feeling dog-tired at the end of the day. The day came when Paddy remolded his office into a more spacious, warm and friendly surrounding which reflected the essence of tranquility where he could serve tea to his patients while he sat and visited with his patients. Paddy reopened the office and worked only by referral. He soon transformed his $65,000 practice to a $400,000 practice.

A participant at that workshop took this story to heart. She made some changes to her dance business and went from charging $65 per hour to charging $200 per hour. How’s that for profit AND getting paid what you’re worth:)

Business Tip 4. Move from Marketing Tactically to Marketing Strategically.

Strategic vs. tactic marketing. Do you know the difference? If you are doing a lot of things and not seeming to get anything done, putting out a lot of energy feeling like you are chasing clients and chasing down business, you probably are experiencing tactical marketing. You are in a vicious cycle of working long hours and bringing in mediocre returns.

Let me give you an example of strategy.

If you were a General and your job was to overtake a hill. Overtaking the hill would be the strategy. That’s the over-arching goal. The way you decide to over-take the hill would be the tactic portion of the job you are setting out to do.

If you have done your job and positioned your company in the marketplace, what you will experience is the joy of having your prospects and customers come to you. They seek you out as the obvious choice to serve their needs.

Business Tip 5. Use Your Competitors.

And you say, why would my competitor want to help me?

Well, who you think your competition is may in fact not really be your competition. Let’s take the field of professional organizers. An organizer is an organizer is an organizer. Not necessarily so. I met with an organizer the other day who helps new car dealerships get organized so they can be more productive and make more sales. Wouldn’t it be to her benefit to talk with other organizers and let them know her specialty?

Another real world example. A friend of mine who is a realtor was talking

with one of her competitors and he is planning on retiring the business after 30 years. I had her make an appointment with him to negotiate with him an introduction and endorsement to his client base in exchange she would give him the referral every time one of his clients sells or purchases a home through her. She gets the benefit of his 30 years of work without having to do any upfront marketing saving her time and money and he gets the benefit of knowing his clients will be well taken care of by a very capable and ethical real estate professional and he continues to make money without the work and headache after he retires.

© 2008-2010 Ileana Kane.

WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? Of course you can, as long as you include the following with it:

Home Based Business Tips

Are you working from home? Do you think you lack productivity? Do you think your business does not seem to be improving? Are you unsatisfied and feel like it is all a waste of time? Are you tired of it not yielding any profits? Are you fed up and almost ready to give up? Wait! Before you make a hasty decision, take a look at the Home based Business tips that you can try to improve your business at home.

When most people start a home business, they think of it more as a hobby than a job. The thought they carry while working at home and not at the office, makes a huge difference in their approach towards the job. This is one of the main reasons when home based business tips or internet business plans do not work.

So in order to make sure your home based business works for you, you need to take a more professional step toward it. Work is work! Be it at office or at home. You should to be able to set aside as much time as possible and work on it like you would if you were in an office, and had a grumpy boss.

Next make sure you have a schedule. Set a schedule for each day and make sure that come what may, you stick to it. Often we decide to do whatever needs to be done the next day, tomorrow, tomorrow like we say. But it is important to do what needs to be done today! Realize the need, the importance of getting that job done and make sure you do it. And unfortunately for some tomorrow never comes.

Since you are working from home, often there are chances that you may not be learning anything new. So make sure you do all the research you can. Try different techniques and see what works for you and what does not. Internet Business Plan are interesting. But if you decide to stick only to what is given in the instructions section, you may never be able to really take off. So make sure you do a lot of research and increase your knowledge in this domain.

Easy Internet Business Tips For Small Business Today

Planning to start a small business online means exposing your products and services not just to people in your area, but to a lot of potential customers who are online most of the time. That is why you need effective internet business tips to get you started in doing things right for your web-based business. Check out these tips below and see how you can apply this as you plan your small business today.

Identify Your Niche

If you want to start a promising online business soon, you have to sit down and think about something that you are good at. This is something that a lot of online business owners do before they start out an internet-based business. They think and write about things that they are passionate about.

It is important to consider this as your initial concern because this is where you will put your heart in. You will spend a lot of hours writing content about it, developing materials to sell and promoting it all over online communities so it is highly recommended that you push an online business based on what you are good at. Even a small business coach will tell you the same thing.

Perform Market Research

Now that you have identified the niche that you are going to concentrate on, then it is time to find out if you have a target market for this business. You can come up with a lot of ways to know this. You can start an online survey and ask people to participate using your social media profile to gather information. You can also go out and ask around your local community if you are planning to offer your products and services initially to people within your area.

Get The Needed Online Tools To Start Your Business

After you already have an idea that you have a good market for your business, then the next thing to do is to set up your business using online tools. You can actually search for internet business tips online and you will discover that there are a lot of services that can help you start your online business soon. You can go to Namecheap or Go Daddy to register your domain, then you can check out companies that offer web hosting services.

After this you have to look for website building services to help you set up your own site for your business. Make sure to check out their portfolio to see samples of their work. Do not be afraid to ask questions and tell them your specifications for your business website. They will be more than happy to help you so you can offer your products and services as soon as possible.

Promote Your Business Using Social Media

This is what other small business do to drive people to go to their websites. That is why you have to claim your social media profiles for your business as these help greatly to promote your brand. Know the rules of each social network and promote responsibly. Do this on a daily basis to encourage people to have a look at your latest offerings.

Take note that these are just some of major internet business tips to remember as soon as you are decided to give your online business a try. Use online tools effectively and use the leverage of outsourcing to help you launch your small business online soon.

Financial Accounting and Management Accounting – An Overview

This article deals with a brief overview of some of the differences between financial accounting and management accounting systems. But at first let us understand what accounting is.

What is accounting? Accounting may be defined as a system of collecting, summerising, analysing, and reporting in financial terms, information about a business organisation. The business accounting as understood today, comprises of, financial accounting, and management accounting. These two parts of the business system have something in common and there are differences as well.

As a part of the accounting system of business enterprises, these two differ from each other in many respects.

The first difference is in its structure or formats of its presentation of information. Financial accounting has a single unified structure of presentation, which means, that the information relating to enterprise business system is presented more or less on a uniform basis. The end products of financial accounting are its three basic financial statements, and these are:

– The balance sheet.

– The profit and loss account/income statement.

– The statement of changes in financial position.

The balance sheet presents the financial position of an organisation at any point of time. The profit and loss statement would contain the organisation’s financial performance over a specified period of time, which is usually one year. The inflow and outflow of financial resources of an organisation during a period of time is reported in the statement of changes.

The financial statements prepared are based upon an equation or model, which implies, that all organisations present their financial statements on basis of a uniform structure. This would mean that financial accounting has a unified structure.

Primarily, financial statements are usually meant for people outside the organisation, such as, shareholders, creditors, government, the general public, and like others. These people also get such reports from other organisations, and to maintain uniformity in these statements, financial accounting system uses a unified structure system.

On the other hand, management accounting is mainly concerned with the in-house management. Since the accounting statements are used internally, it varies in structure from organisation to organisation, depending upon the circumstances and requirements of individual use. Therefore, management accounting is tailored to meet the needs of the management of the particular organisation.

The next difference is in the generally accepted accounting principles. Financial accounting is prepared in accordance with the Generally Accepted Accounting Principles, which in short is known as GAAP. Preparation of financial statements following GAAP ensures that the account presentations have been prepared on basis of a norm, as per the general guidelines issued by law.

On the other hand, management accounting is an in-house requirement, and is for the exclusive use of the management of the organisation. These management accounting statements are never made available to the outsiders, and hence could be formulated in the manner as wanted by the in-house management.

The third difference between financial accounting and management accounting is the statutory requirement of preparation of accounts. As discussed above, financial statements are prepared solely for the people outside the organisation, who have interests in the business operation of the organisation. There are shareholders, who would use the information contained in the financial statements, to decide whether or not to invest in the organisation. By law it is mandatory to prepare such statements, and it is a statutory obligation. In fact, the company law not only makes it mandatory to prepare such accounts, it also has laid down the structures, based on which such financial statements need to be prepared.

The fourth difference is the reflection of historical accounts. As mentioned above, there are three types of financial accounting statements that are prepared. Within these three, while the balance sheet and the profit and loss account, report the financial position on a particular date, and the results of operation of the organisation during a specific period of time respectively, the statement of changes of the financial position reports the inflow and outflow of resources during a particular period of time. Therefore, financial statements record historical data. On the other hand, management accounting does not record any financial history of the organisation.

The fourth difference relates to segment reporting. Financial accounting pertains to the business as a whole, though some organisations segment such accounting for its different operating centres. But, as and when the financial statements are presented, it shows the business as a whole. Contrary to this, the management accounting system may present statements in segmented fashion.

Finally, the financial accounting and management accounting differs in respect of their ultimate objectives. Financial accounting is prepared specifically for external reporting, where-as, management accounts are solely for in-house use.

In this brief presentation, it has become quite clear how financial accounting differs with management account preparation. Both of the accounting systems are vital to any business scenario, and are mandatory requirements in a corporate environment.

Financial Statement Analysis for Sales and Marketing Executives

While it is not necessary to be a qualified accountant to design a Strategy for Sales Perfection, a basic understanding of what is involved in financial analysis is essential for anyone in sales and marketing. It is too enticing, and often too easy, to use “blue skies” thinking in planning sales and marketing activities. It is even easier to spend money without fully realizing the return one is getting for it. It is critical that sales and marketing executives be more disciplined and analytical in the way they go about planning, executing and evaluating the sales and marketing plans and strategy. One way of introducing more discipline into the process is by having a basic understanding of the financial implications of decision making, and how financial measures can be used to monitor and control marketing operations. The purpose of this text is to provide exactly that, and the first chapter deals basically with an introduction to the activities involved in financial analysis.

The Income Statement

The P&L (profit and loss) statement otherwise known as the income statement is illustrated below. This is an abbreviated version as most income statements contain much more detail, for example, expenses are typically listed based on their individual.

G/L ledger account:

The income statement measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. The income statement is also known as the “profit and loss statement” or “statement of revenue and expense.”

Sales – These are defined as total sales (revenues) during the accounting period. Remember these sales are net of returns, allowances and discounts.

Discounts – these are discounts earned by customers for paying their bills on tie to your company.

Cost of Goods Sold (COGS) – These are all the direct costs that are related to the product or rendered service sold and recorded during the accounting period.

Operating expenses – These include all other expenses that are not included in COGS but are related to the operation of the business during the specified accounting period. This account is most commonly referred to as “SG&A” (sales general and administrative) and includes expenses such as sales salaries, payroll taxes, administrative salaries, support salaries, and insurance. Material handling expenses are commonly warehousing costs, maintenance, administrative office expenses (rent, computers, accounting fees, legal fees). It is also common practice to designate a separation of expense allocation for marketing and variable selling (travel and entertainment).

EBITDA – earnings before income tax, depreciation and amortization. This is reported as income from operations.

Other revenues & expenses – These are all non-operating expenses such as interest earned on cash or interest paid on loans.

Income taxes – This account is a provision for income taxes for reporting purposes.

The Components of Net Income:

Operating income from continuing operations – This comprises all revenues net of returns, allowances and discounts, less the cost and expenses related to the generation of these revenues. The costs deducted from revenues are typically the COGS and SG&A expenses.

Recurring income before interest and taxes from continuing operations – In addition to operating income from continuing operations, this component includes all other income, such as investment income from unconsolidated subsidiaries and/or other investments and gains (or losses) from the sale of assets. To be included in this category, these items must be recurring in nature. This component is generally considered to be the best predictor of future earnings. However, non-cash expenses such as depreciation and amortization are not assumed to be good indicators of future capital expenditures. Since this component does not take into account the capital structure of the company (use of debt), it is also used to value similar companies.

Recurring (pre-tax) income from continuing operations – This component takes the company’s financial structure into consideration as it deducts interest expenses.

Pre-tax earnings from continuing operations – Included in this category are items that are either unusual or infrequent in nature but cannot be both. Examples are an employee-separation cost, plant shutdown, impairments, write-offs, write-downs, integration expenses, etc.

Net income from continuing operations – This component takes into account the impact of taxes from continuing operations.

Non-Recurring Items:

Discontinued operations, extraordinary items and accounting changes are all reported as separate items in the income statement. They are all reported net of taxes and below the tax line, and are not included in income from continuing operations. In some cases, earlier income statements and balance sheets have to be adjusted to reflect changes.

Income (or expense) from discontinued operations – This component is related to income (or expense) generated due to the shutdown of one or more divisions or operations (plants). These events need to be isolated so they do not inflate or deflate the company’s future earning potential. This type of nonrecurring occurrence also has a nonrecurring tax implication and, as a result of the tax implication, should not be included in the income tax expense used to calculate net income from continuing operations. That is why this income (or expense) is always reported net of taxes. The same is true for extraordinary items and cumulative effect of accounting changes (see below).

Extraordinary items – This component relates to items that are both unusual and infrequent in nature. That means it is a one-time gain or loss that is not expected to occur in the future. An example is environmental remediation.

The Balance Sheet

The balance sheet provides information on what the company owns (its assets), what it owes (its liabilities) and the value of the business to its stockholders (the shareholders’ equity) as of a specific date. It is called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders’ equity).

Assets are economic resources that are expected to produce economic benefits for their owner.

Liabilities are obligations the company has to outside parties. Liabilities represent others’ rights to the company’s money or services. Examples include bank loans, debts to suppliers and debts to employees.

Shareholders’ equity is the value of a business to its owners after all of its obligations have been met. This net worth belongs to the owners. Shareholders’ equity generally reflects the amount of capital the owners have invested, plus any profits generated that were subsequently reinvested in the company.

The balance sheet must follow the following formula:

Total Assets = Total Liabilities + Shareholders’ Equity

Each of the three segments of the balance sheet will have many accounts within it that document the value of each segment. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates the differences between varying types of businesses.

Current Assets – These are assets that may be converted into cash, sold or consumed within a year or less. These usually include:

Cash – This is what the company has in cash in the bank. Cash is reported at its market value at the reporting date in the respective currency in which the financials are prepared. Different cash denominations are converted at the market conversion rate.

Marketable securities (short-term investments) – These can be both equity and/or debt securities for which a ready market exists. Furthermore, management expects to sell these investments within one year’s time. These short-term investments are reported at their market value.

Accounts receivable – This represents the money that is owed to the company for the goods and services it has provided to customers on credit. Every business has customers that will not pay for the products or services the company has provided. Management must estimate which customers are unlikely to pay and create an account called allowance for doubtful accounts. Variations in this account will impact the reported sales on the income statement. Accounts receivable reported on the balance sheet are net of their realizable value (reduced by allowance for doubtful accounts).

Notes receivable – This account is similar in nature to accounts receivable but it is supported by more formal agreements such as a “promissory notes” (usually a short-term loan that carries interest). Furthermore, the maturity of notes receivable is generally longer than accounts receivable but less than a year. Notes receivable is reported at its net realizable value (the amount that will be collected).

Inventory – This represents raw materials and items that are available for sale or are in the process of being made ready for sale. These items can be valued individually by several different means, including at cost or current market value, and collectively by FIFO (first in, first out), LIFO (last in, first out) or average-cost method. Inventory is valued at the lower of the cost or market price to preclude overstating earnings and assets.

Prepaid expenses – These are payments that have been made for services that the company expects to receive in the near future. Typical prepaid expenses include rent, insurance premiums and taxes. These expenses are valued at their original (or historical) cost.

Long-Term assets – These are assets that may not be converted into cash, sold or consumed within a year or less. The heading “Long-Term Assets” is usually not displayed on a company’s consolidated balance sheet. However, all items that are not included in current assets are considered long-term assets. These are:

Investments – These are investments that management does not expect to sell within the year. These investments can include bonds, common stock, long-term notes, investments in tangible fixed assets not currently used in operations (such as land held for speculation) and investments set aside in special funds, such as sinking funds, pension funds and plan-expansion funds. These long-term investments are reported at their historical cost or market value on the balance sheet.

Fixed assets – These are durable physical properties used in operations that have a useful life longer than one year.

This includes: Machinery and equipment – This category represents the total machinery, equipment and furniture used in the company’s operations. These assets are reported at their historical cost less accumulated depreciation.

Buildings or Plants – These are buildings that the company uses for its operations. These assets are depreciated and are reported at historical cost less accumulated depreciation.

Land – The land owned by the company on which the company’s buildings or plants are sitting on. Land is valued at historical cost and is not depreciable under U.S. GAAP (generally accepted accounting principles).

Other assets – This is a special classification for unusual items that cannot be included in one of the other asset categories. Examples include deferred charges (long-term prepaid expenses), non-current receivables and advances to subsidiaries.

Intangible assets – These are assets that lack physical substance but provide economic rights and advantages: patents, franchises, copyrights, goodwill, trademarks and organization costs. These assets have a high degree of uncertainty in regard to whether future benefits will be realized. They are reported at historical cost net of accumulated depreciation.

Current liabilities – These are debts that are due to be paid within one year or the operating cycle, whichever is longer. Such obligations will typically involve the use of current assets, the creation of another current liability or the providing of some service.

Bank indebtedness – This amount is owed to the bank in the short term, such as a bank line of credit.

Accounts payable – This amount is owed to suppliers for products and services that are delivered but not paid for.

Wages payable (salaries), rent, tax and utilities – This amount is payable to employees, landlords, government and others.

Accrued liabilities (accrued expenses) – These liabilities arise because an expense occurs in a period prior to the related cash payment. This accounting term is usually used as an all-encompassing term that includes customer prepayments, dividends payables and wages payables, among others.

Notes payable (short-term loans) – This is an amount that the company owes to a creditor, and it usually carries an interest expense.

Unearned revenues (customer prepayments) – These are payments received by customers for products and services the company has not delivered or for which the company has not yet started to incur any cost for delivery.

Dividends payable – This occurs as a company declares a dividend but has not yet paid it out to its owners.

Current portion of long-term debt – The currently maturing portion of the long-term debt is classified as a current liability. Theoretically, any related premium or discount should also be reclassified as a current liability.

Current portion of capital-lease obligation – This is the portion of a long-term capital lease that is due within the next year.

Long-term Liabilities – These are obligations that are reasonably expected to be liquidated at some date beyond one year or one operating cycle. Long-term obligations are reported as the present value of all future cash payments. Usually included are:

Notes payables – This is an amount the company owes to a creditor, which usually carries an interest expense.

Long-term debt (bonds payable) – This is long-term debt net of current portion.

Deferred income tax liability – GAAP (generally accepted accounting principles) allows management to use different accounting principles and/or methods for reporting purposes than it uses for corporate tax fillings to the IRS. Deferred tax liabilities are taxes due in the future (future cash outflow for taxes payable) on income that has already been recognized for the books. In effect, although the company has already recognized the income on its books, the IRS lets it pay the taxes later due to the timing difference. If a company’s tax expense is greater than its tax payable, then the company has created a future tax liability (the inverse would be accounted for as a deferred tax asset).

Pension fund liability – This is a company’s obligation to pay its past and current employees’ post-retirement benefits; they are expected to materialize when the employees take their retirement for structures like a defined-benefit plan. This amount is valued by actuaries and represents the estimated present value of future pension expense, compared to the current value of the pension fund. The pension fund liability represents the additional amount the company will have to contribute to the current pension fund to meet future obligations.

Long-term capital-lease obligation – This is a written agreement under which a property owner allows a tenant to use and rent the property for a specified period of time. Long-term capital-lease obligations are net of current portion.

Statement of Cash Flow

The statement of cash flow reports the impact of a firm’s operating, investing and financial activities on cash flows over an accounting period.

The cash flow statement shows the following:

How the company obtains and spends cash

Why there may be differences between net income and cash flows

If the company generates enough cash from operation to sustain the business

If the company generates enough cash to pay off existing debts as they mature

If the company has enough cash to take advantage of new investment opportunities

Segregation of Cash Flows

The statement of cash flows is segregated into three sections: Operations, investing, and financing.

Cash Flow from Operating Activities (CFO) – CFO is cash flow that arises from normal operations such as revenues and cash operating expenses net of taxes. These include:

Cash inflow: is the positive influx of funds from (1) positive revenue from sale of goods or services (2) interest from indebtedness and (3) dividends from investments.

Cash outflow: is the negative (payments) most commonly categorized as (1) Payments to suppliers (2) payments to employees (3) payments to the government (4) payment to lenders (5) payment for other expenses.

Cash Flow from Investing Activities (CFI) – CFI is cash flow that arises from investment activities such as the acquisition or disposition of current and fixed assets. These include:

Cash inflow is the receipt of cash from (1) the sale or disposition of property, plant or equipment (2) the sale of debt or equity securities or (3) lending income to other entities.

Cash outflow is the payment of (1) the purchase of property plant and equipment, (2) purchase of debt or other equity securities, or (3) lending to other entities,

Cash flow from financing activities (CFF) – CFF is cash flow that arises from raising (or decreasing) cash through the issuance (or retraction) of additional shares, or through short-term or long-term debt for the company’s operations.

Financial Statement Analysis

Vertical Analysis

Analyzing a single period financial statement works well with vertical analysis. On the income statement, percentages represent the correlation of each separate account to net sales. Express all accounts other than net sales as a percentage of net sales. Net income represents the percentage of net sales not used on expenses. For example, if expenses total 69 percent of net sales, net income represents the remaining 31 percent. Vertical analysis performed on balance sheets uses total assets and total liabilities for comparison of individual balance sheet accounts.

Horizontal Analysis

Horizontal analysis is the comparison of data sets for two periods. Financial statements users review the change in data much like an indicator. Optimistic analysts look for growth in revenue, net income and assets in addition to reductions in expenses and liabilities. Calculating absolute dollar changes requires the user to subtract the base figure from the current figure. Expressing changes with percentages requires the user to divide the base figure by the current figure, and multiply by 100.

Trend Analysis

Review of three or more financial statement periods typically represents trend analysis, a continuation of horizontal analysis. The base year represents the earliest year in the data set. Although dollars can represent subsequent periods, analysts commonly use percentages for comparability purposes. Users review statements for patterns of incremental change representing changes in the business in questions. Financial statement improvements include increased income and decreased expenses.

Ratio Analysis

Ratios express a relationship between two more financial statement totals, and compare to budgets and industry benchmarks. Five common categories of ratios exist: liquidity, asset turnover, leverage, profitability and solvency. Reviewing ratios for performance compared with prior periods or industry specific benchmarks provides financial statements users with recognition of strengths and weaknesses.

Limitations

Analyzing financial statements presents an opportunity for reviewing past data and possibly budgets. However, the data used is historical in nature, indicating it may not be a good representation of the future due to unforeseeable circumstances. Market value of assets and liabilities can be under or overstated significantly leaving statement users unaware of the real value of a balance sheet. Pro forma statements, or forward-looking financial statements, provide estimates at best resulting in speculation.

Cost-Volume-Profit

Cost-volume-profit analysis provides owners and managers with an understanding of the relationship between fixed and variable costs, volume of products manufactured or sold and the profit resulting from sales. The financial relationship includes contribution margin analysis, break-even analysis and operational leverage. Financial statements provide the data to perform cost-volume-profit analysis.

Contribution Margin

Contribution margin analysis allows managers to look at the percentage of each sales dollar remaining after payment of variable costs, including cost of goods, commissions and delivery charges. Managers and owners use this analysis to help determine the pricing, mix, introduction and removal of products. Contribution margin analysis also aids managers with determining how much incentive to use for sales commissions and bonuses. Comparing each product offered affords the opportunity to look at product profitability and product mix.

Break-even

Break-even analysis considers the sales volume at which fixed and variable costs are even. Owners and managers must consider two primary figures when calculating the break-even. First, gross profit margin, which is the percentage of sales remaining after payment of variable costs. And fixed costs, including administration, office and marketing. Financial statements provide both sets of data necessary to calculate the break-even volume.

Operational Leverage

Every business model contains slightly different operating leverage, which compares the amount of fixed costs to sales. Businesses with higher fixed costs will experience a larger multiplier in their operating leverage, indicating less sales growth results in more profit. However, the same is true for losses, where small reductions in sales exponentially increase net losses. Less operating leverage results in less growth of net income.

Financial Ratios

A financial ratio expresses a mathematical relationship between two or more sets of financial statement data and commonly exhibits the relationship as a percentage. Profitability, solvency, leverage, asset turnover and liquidity comprise the five standard ratio categories. Managers and owners should review the ratios period over period, determining where unfavorable trends exist. After reviewing trends, benchmark ratios against industry standards, which managers can acquire from a variety of sources including industry-specific organizations.

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise’s financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm’s creditors.

Ratios can be used to judge the organization’s “liquidity”, i.e. can it pay its bills, its “leverage”, i.e. how is it financed and its “activities”, i.e. the productivity and efficiency of the organization. Taking liquidity analysis only, this has a bearing on new product planning, marketing budgets and the marketing decisions.

Financial analysis can be used to serve many purposes in an organization but in the area of marketing it has four main functions:

Gauge how well marketing strategy is working (situation analysis)

Evaluate marketing decision alternatives

Develop plans for the future

Control activities on a short term or-day to-day basis.

Understanding a company’s financial performance is critical to developing a solid Strategy for Sales Perfection as well as being an educated and well informed company executive. The purpose of this discussion is to introduce you to the concepts and points of analyzing financial statements and using ratios to develop informed business decisions. The information discussed in this chapter in no way will substitute the job function of your CFO or your CPA.

Financial statements can be quite complex and accounting principles may have significant effect on the way they are reported. Understand that a coordinated dialogue with your accounting staff is critical to obtain clear and concise knowledge of your company financial statements. Financial ratios have limitations and specific uses if interpreted properly. Attention should be given to the following issues when using financial ratios:

A reference point is needed. To be meaningful most ratios must be compared to historical values of the same firm, your company forecasts, or ratios with similar companies.

Most ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined to draw on a conclusion of the purpose of the analysis.

Take into account seasonal factors and business cycles when using financial ratios. Average values should be used when they are available.

Communicate with your accounting department to understand their philosophy and accounting principles.

Sales and Profit Ratio Model

Several profit models have been introduced over the years to gauge the performance of a company and to build a statistical measure to peak performance. We have developed a very simple model that measures four critical areas of performance: gross profit margin %, net profit margin %, RONA – return on net assets, and GMROI – gross margin return on inventory. Earlier in the chapter, we introduced a set of financial statements of which we will use the data from those as part of our illustration of the Sales and profit model.

Sales

COGS – cost of goods sold

Operating expenses – net of depreciation, amortization and interest charges

Fixed assets – property plant and equipment net of depreciation

Current assets

Current liabilities

Inventory

Net Income – after tax income

This model can be set up in an excel spreadsheet to keep track and measure the company’s progress in attaining peak sales performance; monthly tracking should be supported to insure constant improvements. These four ratios are the best measure of a company’s overall sales performance and should be compared to others in your industry to attain top performance standards.

Gross Margin Return on Inventory (GMROI) is a “turn and earn” metric that measures inventory performance based on both margin and inventory turnover. In essence, GMROI answers the question, “For every dollar carried in inventory, how much is earned in gross profit?” GMROI can be calculated at the organization level and, if the proper data is collected at the item level, all the way down to an individual item.

To set a benchmark for the organization, use either current financial statements or budgets for the future. Calculate the GP %, ITO and compute the existing or target GMROI. Measure every appropriate segment against this target. You will identify groups that are exceeding the targets and also those that are not pulling their own weight. While most organizations have some “loss leaders”, it is important to understand which items/groups that are under-performing. Choices are to live with the performance, improve the margin, improve the turnover or in extreme cases, discontinue the poor performing product.

Break-Even Profit Analysis

In business and economics, break-even analysis is a commonly used practice to set pricing multiples or price indexes. Companies need to use break even analysis to determine many relevant factors when designing a strategy for sales perfection. In the linear “cost-volume profit analysis”, the break-even point in terms of units (X) can be directly computed in terms of total revenue (TR) and total costs (TC) as:

The relationship between gross profit margins and sales revenue is approximately a 3.5 to 1 ratio. Simply stated, if you reduce your margin by 1/2 percentage point (.5%) you will need to raise your revenue by 1.7% to maintain the same amount of gross profit. Look at the table above which clearly illustrates this concept, now compare this illustration to your own company. Let’s assume your company has total revenue of $45,000,000, a reduction in margins of a half percent (0.5%) would require you to raise revenue to $48,375,000 to maintain the same amount of income. Your objective as an executive inside your company is to improve your company’s financial position.

Our website winning sales strategy and our book “Strategies for Sales Perfection: In the New Economy provide detailed analysis and explanations of this information along with a plethora of additional resources to allow your company to succeed during these this new economic recovery period.

Strategies for Sales Perfection: In the new Economy is a book written to help company executives develop a plan to support growth. to learn more visit our website at winning sales strategies.com