How many times in the past year have you been asked how your business is doing? You might need a laptop to calculate the number, and if you are like the majority of business owners in this economic climate, you might not give an upbeat appraisal. But would that be totally accurate?
Right now, most businesses are experiencing a down cycle, including slower sales and lower profit margins. This creates pessimism, but perhaps things are not quite as they seem. CPAs are often called upon by banks, clients and others to evaluate a business' financial results. As a result, we have found various tools that help us compare clients' financial results with that of their competitors.
This article will introduce some business evaluation tools that will help you in running your business. But before we proceed, there is one catch. As with everything else in business, you need to make sure that you are comparing apples to apples. Most data sources run behind in the data they publish because of the sheer volume of information they process. Accordingly, make sure you compare the same time periods.
Some sources also break out financial results based on a measure of company size. Whenever possible, use data for companies that are the same size as your company. This is highly important because the characteristics of your company (operating margins, asset requirements, employee demographics, etc.) will not normally equate to companies that are significantly larger than yours.
Let's take an example. You run a landscaping business that employs one other person. You and your employee spend your days serving customers. At night, you and your spouse handle all the administrative work. Accordingly, your bottom line results will typically reflect a higher net income as a percent of sales than your competitor who has 50 employees, a sales team and a full-time office staff. Your competitor might net more, but because the recorded expenses are so much higher, the net income percentage will be lower as a result of simple mathematics.
External Data Sources
Data sources external to your business fall into three broad categories: association, governmental and, for lack of a better term, commercial.
Association sources include trade and other business associations. For example, one source of data relative to CPAs published annually is the National MAP Survey, by the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. There are many industry associations that regularly survey their members to gain a sense of business conditions.
Governmental bureaus at the federal, state and local levels collect all types of data for use in formulating policy and assisting their constituents. The U.S. Government provides a comprehensive listing of its data sources at usa.gov. Additionally, most states have economic development or commerce departments that can help you decipher their individual business climates.
Commercial data sources abound and can provide you with valuable information on your industry and, in some cases, on your competitors. Most sites carry a price tag for reports they provide. Prices can range from very reasonable to exorbitant. For example, BizMiner provides multiple options from single report pricing of $66 to annual subscriptions of $1,000 and up. The Risk Management Association offers information for anywhere from $75 per industry report for members ($135 for non-members) and up. These are just two of the many statistical sources available to you to help obtain information to better operate your business (note: citing them here is not an endorsement). Before you purchase any product, research it and make sure it provides the data you need to analyze your operations.
In your efforts to analyze the success of your operations, don't forget to review your own internal data. Prior monthly and yearly financial statements and tax returns, as well as sales and production records can provide invaluable assistance in analyzing both your current situation and trends. Only when you look at your past can you truly appreciate your current status.
This article is meant only as a starting point in helping you find meaningful data to properly evaluate your business' strengths, weakness and prospects. As a business owner, you owe it to your company and yourself to use every tool at your disposal to help you make the right decisions. Give us a call if you need assistance in developing a reporting mechanism, including the proper external data, to help you analyze the health of your business.
Have a great August.