INTERPRETING FINANCIAL STATEMENTS

The horticulturist should have an outside accountant prepare all finan­cial statements for the business. Few horticulturists have the time to stay abreast of ongoing changes in the tax laws or the rush to computer technology that is altering the way accountants conduct their opera­tions. Still, the horticulturist must be able to understand and utilize the reports of the accountant once they are prepared. The horticulturist should also request reports as often as needed to gain maximum ben­efit. Therefore, a quarterly financial statement may be all that is needed to complete required governmental forms but not sufficient to benefit the business. Monthly statements are common to all horticulture enter­prises, and weekly statements are not uncommon.

There are two parts to a financial statement: a balance sheet and a profit-and-loss statement. Balance sheets are prepared periodically by the firm’s accountant to show the financial status of the business on the date of issue. The company’s assets, liabilities, and net worth as of that date are shown. By comparing items in the balance sheet with those at the same time last year, trends can be determined. For example, if the balance sheet indicates increasing amounts of assets tied up in inven­tories and accounts receivable, the owner may wish to examine and alter purchasing practices, credit extension, and/or collection meth­ods.

The profit-and-loss statement records how much money the busi­ness earned or lost over the period of time measured (monthly, quar­terly, or annually). In other words, the balance sheet shows the amount of net income at a certain point in time; the profit-and-loss statement can explain how the money was earned (or lost) over a period of time. When a profit-and-loss statement is compared with one for the same period a year ago or with the planned budget for the current period, accomplishments and failures become quickly apparent. Consider the following simplified example.

Analysis of Table 25-1 shows that increased net sales do not neces­sarily mean increased net profits. Although sales increased by $8,000 between 2009 and 2010, the net operating profit declined by $3,600. Further analysis offers some explanations. The cost of goods sold were unexpectedly high, with an increase of 30 percent in 2010. Inflation might be the cause, or it could be that vendor prices were not compared before purchasing. Perhaps salaries and wages should not have been raised as much as the budget called for, and the additional expenditure of $500 beyond what the budget called for did not help the situation. Perhaps prices were too low.

A similar comparison, made monthly, can permit the business manager to curtail unprofitable expenditures or types of work in time to avoid losses for the year. If necessary, prices can be raised when the

profit-and-loss statement indicates that excessive expenses are not to blame for the decline in profits.