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  • Stephen Newland

TBL #002 - Five Minutes to Get Valuable Insights ⏱️




Have you ever looked at your financial statements & thought… 

“I have no idea what this is telling me about my business”

 

If so, don’t feel bad…you’re in the majority. 

I want to help change that so you can see the power that comes along with clean accounting & easy to digest financial statements.

 

There’s one piece of analysis that I do to help get a good understanding of what’s been going on in a business.

It’s called the common-size analysis & it can show you some important areas to look more into. 

 

What Is It & How To Do It

A common-size analysis is taking one line item on your financial statements & seeing what % that is of another line item.

 

What’s that mean in non-finance talk?

Let’s say you’re looking at your P&L (Profit & Loss). You would take your salaries / your total revenue for that period. You can repeat this formula for any line item.

 

What you’re trying to do is get a measure on how much of a bite your costs are taking out of your revenue.

 

It’s as simple as dividing two #’s together. That’s it!




How Can I Practically Use It?

The natural progression in business is for more & more costs to creep in over time.

 

I’ve seen it happen even with smaller companies.

 

I helped one company save nearly $30k of annual subscriptions they were no longer using (and the business was only a few years old!)

 

You can look at this analysis is one of two ways:

  • At a single point in time (ie the last 6 months)

  • Over time (ie in 6 month or 12 month increments)

 

The real benefit comes when you look at it over time.

 

Let’s say your revenue has decreased since last year, but your payroll has roughly stayed the same.

 

Your payroll will now show as a higher % of your revenue this year.

 

Seeing that may cause you to pause & ask if you’re overstaffed given your current level of revenue. 

I recommend repeating this exercise across any line items that are >5% of your revenue.  

By doing so, it acts as a check engine light across your business.

 

This can easily highlight areas of over or under investment vs. the past & potential issues with margins. Those are great ways to identify areas to focus on in your business!

 

Here are a few questions you can ask after you've prepped the analysis:

  • Are there any line items in my Cost of Sales (or Cost of Goods Sold) that have increased over time? Why & can they be mitigated?

  • Is my gross margin increasing or decreasing over time? Is this because my Cost of Sales have increased, but my pricing has stayed flat?

  • Has payroll increased or decreased as a % of my revenue?

  • Has sales/marketing changed as a % of revenue? If it’s gone up, am I seeing more new revenue? If it’s gone down, am I seeing a drop off in new revenue?

  • Has my software/subscription spending increased as a % of revenue? If so, it may be good to do a review & remove unnecessary costs. 


The goal is for this to be a quick exercise you can do to get some insight into how your business is changing over time. 


This is meant to highlight areas to dig deeper into. 


It can help you see how your business & it’s financial picture is changing over time.


Try it out & if you have any questions, email me at stephen@moneypathfpa.com or shoot me a message on LinkedIn!

 

 

💸 The Bottom Line 💸

  • A common-size P&L analysis takes your expense line items & finds what % of revenue is going to pay for them.

 

  • You can see how the economics of your business are changing over time by doing the analysis over multiple time periods & identifying trends.

 

  • The real benefit of this analysis comes from asking questions about why line items have changed %'s over time. This will lead you to areas that need more exploration in your business.

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