Preparing Analytical Tools

Management should have an accountant or analyst prepare analytical tools such as a common-size income statement. This income statement shows every expense as a percentage of sales, allowing management to isolate costs that could contribute to decreasing profits. The company can perform this analysis for, preferably, three years of historical data. An analyst compares the three years to each other by reading across horizontally. Expenses as a percent of revenue are compared for each year to reveal trends that show expenses rising or lowering as a percent of sales over time. Some costs, such as the cost of goods sold, will naturally rise with sales increases because they represent the raw goods used to make products to sell. Building rent, administrative costs and some utility bills should remain the same, regardless of increases in sales.