Many small businesses believe their financial or accounting system is a tool for their banking and tax reporting needs.  They typically sit down at year end and decide what they will have to pay in income taxes.  Some may also sit down at year end to determine how the year went.  Well, by then it’s too late.  Your financial information can provide you guidance throughout the year.  In fact, June 30 is the perfect time to sit down and review your financial reports.  Think about what is working well and what is not working so well.  What can be fixed and what needs to be re-programmed.  Waiting until year end will only magnify the problems. 

We have seen many cases where the sales are increasing and the business owner therefore feels pretty comfortable that all is well.  But when the end of the year comes and the numbers are reviewed, the margins have deteriorated and the Company is not profitable even with the higher sales volumes.  It may be that someone started buying goods from a new supplier or the existing supplier has started to charge more.  OR that defects and returns have increased.  Many factors can contribute to slipping margins.  But one thing is sure; when it slips, it will continue until someone pays attention to the numbers and reacts!

Mid-year performance reviews can bring problems like a slipping margin into focus.  Then the management team can react and correct the issue or issues.  A typical, mid-year performance review would include analysis of revenue and expenses compared to prior year and budgets.  It would also include monthly comparisons in areas where there are large variances.  You want to answer the questions, “Will office expense continue at the current level?”  “Why has it increased or decreased over last year?”  “Do the variances make sense based on what you know about your business?” 

Your mid-year performance review should always include a review of the balance sheet.  These are your assets…you should know what they are.  In many cases, an error on the balance sheet will turn into a change on the income statement.  So by ignoring the balance sheet you may incorrectly assume the income statement analysis looks normal.  You should also consider reviewing the product mix and the respective purchasing trends.  Are we buying what is selling or are we buying and storing?  Management should analyze inventory and accounts receivable levels.  Look for changes in pricing and collections.  Finding these issues early will help keep them from becoming major headaches at year end.

The performance review does not have to be elaborate; it just needs to make sense to you.  So take a few minutes to review your financial reports and ask questions.  Lots of questions!  The answers may surprise you.