Do you know what your business is driving to your bottom line?
By Chris Lantz
Stop ignoring your financial statements! This is really as complicated as it gets. Most people look at their financial statements like oh, yeah I know it's good for me but it is awful going down. Let me simplify it for you. Anytime anybody runs a business you have to answer three questions and really only three. Are you making money? That answer you will find on your profit and loss statement. Do you have enough cash to pay the bills for three months? This means can you cover your operating expenses for three months, or at least one quarter. Your cash flow statement will answer that question. Last but not least are you creating or destroying wealth? Your balance sheet will answer that question. So, your financial statements, you know what they are? They are your spouse. I know it sounds crazy, but they really are. They are always speaking to you, but can you hear them? Are you listening to them?
Your financial dashboard, the “Three Musketeers”, are your Net Income Statement, your Cash Flow Statement, and your Balance Sheet. You can look at these just like the dashboard on your automobile. Your net income statement, we use the metaphor that your net income statement is a lot like your speedometer. Your speedometer doesn't tell you that you are driving over the speed limit, you have to know what the speed limit is and know the calibration on your speedometer. Are you generating enough profit or not? Cash flow is a lot like your gas gauge. Your gas gauge doesn't tell you to go buy gas, it is up to you to figure out if your calibration is on "E" for Empty, which means you better get some gas or you will be in trouble if you don't. Your cash flow statement will tell you if you have enough cash to run the business, and if you don't you will have to think about things you should do to fix that, otherwise you will not be financially sound. Your Balance Sheet is very important as it captures everything that's happening in your business from the beginning to today and your Balance Sheet, frankly, helps value your business. Are you just creating a job for yourself or are you building an asset that you can sell possibly in the future?
In this short article we are going to focus on the Net Income Statement. What your Net Income Statement really is a great big pile of money which is your Net Revenues (Sales). We have to pay a whole bunch of bills. Have to pay suppliers (cost of doing business) and then we are left with Gross Margin. Remember you run your business on Gross Margin, you don't run on revenues nor do you run it on sales. They are correlated, but really your Gross Margin is going to determine how easy or difficult it's going to be to pay your fixed expenses and variable expenses (fuel, building rent, leases, ect). Once all that is taken out it leaves you with your earnings before taxes which is what you have left to pay all the various governmental agencies in partnership with you, whether we like it or not. The Net Income, that tiny pile we have left is why you are in business. That number that we call our Net Income needs to be about 8-10% in order for you to have a viable business. No one ever talks about this stuff but it’s very important to make sure the business you’re doing is for the purpose of being in business….To make money!