The profit analysis of each major item help you find out the strong and weak areas of
your operations. They can help you to make profit-increasing decisions to drop a product
line or service or to place particular emphasis behind one or another.
Records
Good records are essential. Without them a firm doesn't know where it's been, where it
is, or where it's heading. Keeping records that are accurate, up-to-date, and easy to use
is one of the most important functions of the owner-manager, his or her staff, and his or
her outside counselors (lawyer, accountant, banker).
Basic Records
18. Do you have a general journal and/or special journals, such as one for cash
receipts and disbursements?
A general journal is the basic record of the firm. Every monetary event in the life of
the firm is entered in the general journal or in one of the special journals.
19. Do you prepare a sales report or analysis?
(a) Do you have sales goals by product, department, and accounting period (month,
quarter, year)?
(b) Are your goals reasonable?
(c) Are you meeting your goals?
If you aren't meeting your goals, try to list the likely reasons on a sheet of paper.
Such a study might include areas such as general business climate, competition, pricing,
advertising, sales promotion, credit policies, and the like. Once you've identified the
apparent causes you can take steps to increase sales (and profits).
To Financial Management
Analysis - Top
Buying and Inventory System
20. Do you have a buying and inventory system?
The buying and inventory systems are two critical areas of a firm's operation that can
affect profitability.
21. Do you keep records on the quality, service, price, and promptness of delivery
of your sources of supply?
22. Have you analyzed the advantages and disadvantages of:
(a) Buying from several suppliers,
(b) Buying from a minimum number of suppliers?
23. Have you analyzed the advantages and disadvantages of buying through cooperatives
or other systems?
24. Do you know:
(a) How long it usually takes to receive each order?
(b) How much inventory cushion (usually called safety stock) to have so you can
maintain normal sales while you wait for the order to arrive?
25. Have you ever suffered because you were out of stock?
26. Do you know the optimum order quantity for each item you need?
27. Do you (or can you) take advantage of quantity discounts for large size single
purchases?
28. Do you know your costs of ordering inventory and carrying inventory?
The more frequently you buy (smaller quantities per order), the higher your average
ordering costs (clerical costs, postage, telephone costs etc.) will be, and the lower the
average carrying costs (storage, loss through pilferage, obsolescence, etc.) will be. On
the other hand, the larger the quantity per order, the lower the average ordering cost and
the higher the carrying costs. A balance should be struck so that the minimum cost overall
for ordering and carrying inventory can be achieved.
29. Do you keep records of inventory for each item?
These records should be kept current by making entries whenever items are added to or
removed from inventory. Simple records on 3 x 5 or 5 x 7 cards can be used with each item
being listed on a separate card. Proper records will show for each item: quantity in
stock, quantity on order, date of order, slow or fast seller, and valuations (which are
important for taxes and your own analyses.)
Other Financial Records
30. Do you have an accounts payable ledger?
This ledger will show what, whom, and why you owe. Such records should help you make
your payments on schedule. Any expense not paid on time could adversely affect your
credit, but even more importantly such records should help you take advantage of discounts
which can help boost your profits.
31. Do you have an accounts receivable ledger?
This ledger will show who owes money to your firm. It shows how much is owed, how long
it has been outstanding and why the money is owed. Overdue accounts could indicate that
your credit granting policy needs to be reviewed and that you may not be getting the cash
into the firm quickly enough to pay your own bills at the optimum time.
32. Do you have a cash receipts journal?
This journal records the cash received by source, day, and amount.
33. Do you have a cash payments journal?
This journal will be similar to the cash receipts journal but will show cash paid out
instead of cash received. The two cash journals can be combined, if convenient.
34. Do you prepare an income (profit and loss or P&L) statement and a balance
sheet?
These are statements about the condition of your firm at a specific time and show the
income, expenses, assets, and liabilities of the firm. They are absolutely essential.
35. Do you prepare a budget?
You could think of a budget as a "record in advance," projecting
"future" inflows and outflows for your business. A budget is usually prepared
for a single year, generally to correspond with the accounting year. It is then, however
broken down into quarterly and monthly projections.
There are different kinds of budget: cash, production, sales, etc. A cash budget, for
example, will show the estimate of sales and expenses for a particular period of time. The
cash budget forces the firm to think ahead by estimating its income and expenses. Once
reasonable projections are made for every important product line or department, the
owner-manager has set targets for employees to meet for sales and expenses. You must plan
to assure a profit. And you must prepare a budget to plan.
