I saw a presentation which included financial statements.
The financials basically went like this revenues, then expenses, coming to net income.

So, what’s critically missing? Margin information.

By not having margin information, the owner was missing out on some trends that could be taking place in the business. In this case, it happened to be a financial services firm that was under some financial pressure in their industry as part of a typical long-term cycle. When money was readily available and there was a good transaction flow, rates were good. However, when the transaction flow declined, margins would get squeezed.

By not having margin information, he was not able to tell the impact of such a squeeze on his business.

So, regardless of what industry you’re in, now with all cases there should be a gross margin (inaudible), to show what kind of margin you get from the sale of your product or service. In this particular example, to get to gross margin, they would’ve deducted customer transaction cost and salaries paid to producers of such transaction.

So, if you happen to have financials that just go right from revenues to expenses to net income, determine if showing gross margins would make sense in your particular business. If so, change the reporting to put those margins in. Move some expenses up from the general expense pool up into the cost of revenue section, so you can calculate the margins on your business. The insights can be very worthwhile and help you improve your performance.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value