Revenue and Expense Review
March 02, 2016
A revenue and expense review of a company's business is more than simply looking at the numbers in each category. Numbers don't tell the whole story. To effectively review an income statement (also known as an operating statement, a profit and loss statement, or a P&L statement), you should compare results of the current period to previous periods both in dollars and percentages (known as common size statements). Comparison allows you to spot trends – positive and negative – enabling you to make prudent business decisions that will have a positive effect on the future of your business.
Revenue should be reviewed not only for total revenue comparisons, but:
- Revenue by category
- Gross profit margins
- Pricing trends
- Marketing dollars attributable to each line of revenue (if possible)
Expenses should be reviewed not just as stand-alone numbers but also in comparison to other periods. In addition to reviewing what expenses might be lowered, an expense review is most effective when alternative choices are considered that will not only reduce cash outflows but will improve operations. Some examples might be:
- How are automobile expenses reimbursed?
- Should outsourcing be considered for certain functions?
- Is restructuring debt a possibility?
Apart from simply reviewing numbers, a thorough revenue and expense review should involve asking a series of questions. When answers are not immediately apparent or result in negative answers, this is a clear sign that changes might need to be made...or, as an owner, more time might need to be spent concentrating on the details of the business.
Ask yourself these questions about your business and make sure you know the answers...or start digging for them!
- Is all revenue recognized in the correct period?
- How is pricing determined?
- What are sales terms and could they be revised?
- What can be done to make your product or service more marketable and/or more competitive?
- Are there underserved markets that could use your products or services?
- Are you using e-commerce?
- Have you analyzed your marketing dollars for effectiveness?
- Have you obtained competitive quotes from vendors?
- Who approves meals and entertainment?
- Are you spending too much money on seminars and training...or not enough?
- What is the gross profit margin (dollars or percent) for each product or service sold?
Knowing the details of your business is a must to improving operational efficiency and maximizing profit.
Posted by Richard Weinberger, PhD, CPA
Chief Executive Officer
Association of Accredited Small Business Consultants