- December 17, 2020
- Posted by: Jamie Nardello
- Category: Blog
The year is almost up, and that means it’s time to prepare year-end financial statements. And while these reports can be a valuable tool for benchmarking and forecasting. Used correctly, they can help you anticipate and respond to changing markets.
Benchmarking is using past performance or industry standards to evaluate current performance and make educated guesses about the future. A comprehensive benchmarking study includes the following elements:
- Size: Annual revenue and total assets or market share
- Growth: How much the company’s size has changed from previous period
- Liquidity: Working capital ratios and whether current assets are sufficient to cover current liabilities
- Profitability: Whether the business is making money from operations without considering changes in working capital accounts, investments in capital expenditures, and financing activities.
- Turnover: Total asset turnover (revenue divided by total assets) and inventory turnover (cost of sales divided by inventory)
- Leverage: Whether the company finances its operations through debt or equity
Different benchmarks apply to different types of businesses, so it’s important to seek data sorted by industry, size and geographic location. Consider sources including trade journals, conventions, or local roundtable meetings. Your accountant can also provide access to benchmarking studies.
Using Statements to Forecast
These statements also may help forecasting and strategic planning by providing insights into revenue.
Variable expenses and working capital accounts often grow in tandem with revenue, while items such as rent and management salaries are fixed in the short term, and may need to increase in steps over the long term. For example, if a company is at or near full capacity, it may need to expand its premises.
Year-end statements can help management identify when cash shortfalls might happen and avoid this by drawing on its line of credit, laying off workers, reducing inventory levels or improving its collections.
For Guidance and Information
For advice about making year-end statements work for you, contact your trusted advisors at Smolin Lupin. We can help you benchmark and forecast based on what you know.