Try these three things to simplify the examination of your business’s health.

1. Compare the year-to-year results from your profit and loss (income statement).

Ideally, you will compare at least three years.

The first step is to spread the numbers in a side-to-side format.

Excel is excellent for this if your accounting software doesn’t have the capability. This allows you to compare the actual cash amounts during a period of time rather than just looking at a single year. It also allows you to see anomalies (large or small) and research details of a single line item.

Be certain that the expenses in each line item match. If one year you put all of your yellow-pages bills into “telephone expenses” and the next year into “advertising,” you will need to make adjustments to be sure you are comparing similar expenses.

2. Check to see whether your expenses are in line with your sales.

Convert the actual numbers to percentages.

This allows you to look at trends by comparing your expenses as they relate to sales. For example, your advertising expenses may be up in actual numbers but lower as a percentage of sales from one year to the next. What you cannot see in raw numbers becomes very apparent when converted to percentages and compared. This also allows you to see how a slow “price creep” in expenses can throw your entire pricing strategy out of kilter.

Every expense is a ratio to total sales. For example: 2008 — divide advertising ($3,980) by sales ($87,490) to get the percentage (4.5 percent). You can then compare year to year to see whether advertising rises or falls as a percentage of total sales. For example: 2007 — advertising ($2,900) by sales ($47,000) = 6.2 percent. Therefore, although your advertising costs were less in 2007 in dollars, they were actually higher as a percentage.

3. Calculate your break-even point.

One serious issue to consider is your current break-even point. This is the level of income you must have at your current profit margin to pay all your current expenses. To find your approximate break-even point, divide total expenses by contribution margin.

To determine your contribution margin, determine your gross profit (total sales less cost of goods sold). For example, subtract cost of goods of $57,490 from total sales of $87,490 sales to get $30,000 gross profit.

Next, convert to a percentage by dividing gross profit ($30,000) by total sales ($87,490) to determine your contribution margin, which is 34 percent in this example.

If your total expenses are $25,000, you will need to generate $73,530 to break even ($25,000 divided by 0.34).

If this number is reflected in your current sales, things are on track. If the sales number seems remote, you need to examine the expenses you have developed in step one.

This is a quick way to look at the financial health of your business. It is a habit you should practice on a regular basis. Quarterly and annually are good times to compare historical operations to make good decisions about your future.

Jimmie Wilkins is the director of Chemeketa Small Business Development Center. Questions can be faxed to (503) 581-6017, phoned in to (503) 399-5088 or e-mailed to SBDC@ chemeketa.edu.