The numbers drive everything in your businesses. Without a complete understanding of your numbers, you cannot effectively evaluate how your business is doing. And no, you cannot manage the business from your checkbook, though many business owners try.
I find far too many businesses wait until the end of the year to see how they are doing. By then it is too late to make any changes. This is dangerous, if not deadly, to businesses.
If you want to be a great chef, you must learn the language of cooking—teaspoons, tablespoons, ounces, pinches, etc. If you want to be a great musician, you would need to learn the language of music—chords, sharps, flats, etc.
If you want to be successful in business you need to learn the language of business, which is accounting.
- Know Your Numbers: I am not saying you need to be an accountant or have an accounting degree, but you do need some basic accounting knowledge. Doing business without understanding your numbers is a bit like driving a car without instruments. You may think you are going 70 mph when you are only doing 35 mph. Or you think you have a full tank of gas when it is really only a quarter full. They say knowledge is power, and that is certainly true when it comes to your numbers.
- P&L, Balance Sheet, Cash Flow: The P&L (profit & loss) or income statement are simply a report of your revenue minus your expenses, which equals profit. Your P&L should be prepared and reviewed no less than monthly. Income statements are like a movie of a period of time in your business; for example, quarter one (Q1), quarter two (Q2), or YTD. It is important to note that the P&L and balance sheet are lagging indicators, and when you get them from your accountant or bookkeeper, the information may be three or four weeks old.
The balance sheet is a snapshot in time and a record of the things you own and what you owe. Having an accurate balance sheet is vital to your business because it allows you to measure profitability.
Cash is the lifeblood of your business and understanding how cash moves in and out of your business is critical. Will your daily operations generate enough cash to keep the business running and repay debt? Business owners often think of net income as cash, but net income at the bottom of the P&L or income statement is not cash but the theory of cash. The P&L does not take into account your debt (principal) payments or owner’s draws on the business. The cash flow projection is the tool to help you see where your cash is going.
3. Metrics: It has been said that what we measure improves. Utilizing metrics to measure progress will help your business improve and be more profitable. What are your line item expenses as a percentage of revenue? For example, what is COGS as a percentage of revenue? How does it compare to previous years? What is the percentage on a monthly basis? What is each line item as a percentage of gross profit? How is it tracking month to month? By tracking your metrics you are able to ask better questions and make better decisions in your business.
Improve your financial knowledge and improve the success of your business. You can’t run your business form the seat of your pants or from your checkbook. You must understand the numbers in your business. Want to improve your financials in your business? Give us a call. 503-312-3145