An excellent starting point for finding ways to improve the bottom line is to compare your current income statement with those of the previous year. Just as the balance sheet gives you a snapshot picture of the financial condition of your company at a point in time, the income statement shows you the results of your financial operations over a month or quarter, half, or a full year. The income statement is sometimes referred to as the profit and loss statement.

In addition to the income statement, you should also generate a report showing the ratios of expenses to sales and/or ratios of change of sales and expenses on a line-by-line basis and do a comprehensive review of the changes that have occurred.

When reviewing your sales and expenses, focus on any variations, whether they are positive or negative. Past experience will likely direct you to the following high dollar areas.

Sales/Revenue

A review of sales is an integral part of any financial statement analysis. Separate sales into the various categories or services to determine which product lines or services are moving forward and which are lagging behind. This will help you determine if certain product lines or services require more marketing and sales efforts or whether they should be modified or dropped.

Cost of Goods

The cost of goods section is another useful area to review. The proper allocation of expenses, including wages and other costs directly associated with manufacturing a product or providing a service, lets you determine whether the mark-up on goods of services is adequate. If you have several lines of products or services, review each line separately in view of the revenue earned. This will provide additional support in determining whether to invest more money and effort or drop a product or service.

Cost of Goods

Analyze significant changes in wages and benefits. Are increases created by increased costs for overtime, hourly rates or WSIB, EI or health benefits? Are decreases a result of sub-contracting work? It may be necessary to complete a more in-depth analysis by examining the component parts of the actual account.

Review your past expenses for temporary and seasonal staffing. Have your staffing requirements changed and it is time to bring more people on board?

Office

Review recurring costs such as general supplies, subscriptions and software updates. If you are leasing equipment, determine if it would now be more cost-effective to purchase new or used equipment.

Travel

Travel expenses warrant careful attention. Review travel expenses in view of the amount of business the travel actually generated. To determine areas where travel expenses could be reduced, look at the specific components of these expenses. There may be opportunities for trimming some expenses and modifying any caps, such as daily expenses for meals. Be alert to significant increases in any category as this may indicate misallocation or expense abuses.

Analysis is more difficult if an account includes too many categories. This may be an ideal time to set up additional accounts within the general ledger to allow a more comprehensive analysis of specific expense categories in the future.

Vehicles

If repairs and maintenance expenses are low, consider whether you need to budget for increases in these expenses. Could some vehicle expenses be reduced by changing routes or reducing or combining routes to see specific customers?

If vehicle leases are close to renewal, consider whether you should buy-out the lease, renegotiate, or change leasing companies. Is automotive insurance posted to the account and is the coverage adequate? If vehicle expenses are an essential part of production costs, should the allocation be moved to the cost of goods sold?

Management Salaries

Review your salary, bonuses and any dividends received and the remuneration of family members who are involved in the business. If you expect the cash flow or profits may be tight this year, consider reducing your outlays. Review your remuneration planning with your chartered accountant as changes may have an impact on your personal income taxes for the calendar year.

Communications

If your communications expenses, such as Internet and telephone services, have been increasing, can you reduce or renegotiate your rates and services? A package deal or bundle of features may be less expensive as well as better meet the specific needs of your business.

If long distance charges have been allocated to specific customers, projects or business functions, this breakdown will help you identify potential ways of reducing costs. For example, long distance faxes and certain calls can be completed after peak hours or the information can be transmitted by e-mail. If cell phone expenses are greater than anticipated, purchase blocks of time. Alternatively, consider replacing some cell phones with pagers.

Interest

When interest costs are appropriately allocated, you can determine the sources and make adjustments. If, for example, most of the interest expense comes from carrying balances on credit cards, are the cards being used to finance operations? Consider using a line of credit, which can be obtained at a lower interest rate, and pay the credit card balances in full each month.

Track, Control and Manage

For owner/managers, a financial analysis of the past year's results aimed at reducing costs or improving services is a worthwhile management exercise. This comparison and analysis can help you identify trends, determine those revenues/expenses that are not consistent with expectations and highlight areas that need attention in your budget planning.