This Guide is a series of questions with comments to help you analyze your profits, their sufficiency and trend, the contribution of each of your product lines or services to them, and to help you determine if you have the kind of record system you need. The questions and comments are not meant to be definitive presentations on the subjects. Since profit is revenues less expenses, to determine what your profit is you must first identify all revenues and expenses for the period under study. For accounting purposes firms generally use a twelve month period, such as January 1 to December 31 or July 1 to June 30. The selection depends upon the nature of your business, your personal preference, or possible tax considerations.
Expenses are the cost of goods sold and services used in the process of selling goods or services.
There are of course, many other types of expenses, but the point is that every expense must be recorded and deducted from your revenues before you know what your profit is. A financial ratio is an expression on the relationship between two items selected from the income statement or the balance sheet. Ratio analysis helps you evaluate the weak and strong points in your financial and managerial performance. It tells you if you have enough cash to pay your firm's current creditors. The higher the ratio, the more liquid the firm's position is and, hence, the higher the credibility of the firm.