This may seem like an odd question but it’s an important question. It’s probably THE most important question. However, many business owners don’t really know the answer. Or they think they do….but don’t realize they aren’t looking at the right information. They work hard, sell a good product, and as long as they can pay their bills, they call it good. Is that really good enough?
The truth is that mindset may get you through the day to day, but knowing the right information could make you even more profitable. The right information can help fend off disaster down the road. Where do you fit in the examples below?
♦Hey, there’s cash in the bank and my credit cards aren’t maxed out. I’m paying my bills on time, or mostly on time. I pay as much tax as my accountant tells me to pay at the end of the year. Tax time is a nightmare!
♦I’ve got money in the bank each month to pay the bills. I figure out my profit at tax time and compare it to last year. My tax bill is what my accountant says it is but I can see if I made more money than I did last year. Tax time? Yup, still a nightmare.
♦I hate waiting until January or later to figure out my financials. I periodically get my books updated throughout the year. This makes tax time a little less stressful and I can see any changes in my net profit.
♦I like to know how my business is doing month to month or quarter to quarter. I make sure my bank accounts are reconciled and I see my net profit each month. I can see if it’s trending down or up and I can make decisions based on that information. I know I’ve got some room to take advantage of some 179 deductions this year to reduce my tax bill. I’m making enough money and I’m growing….looks like I can afford to hire some help! I send my trial balance to my accountant. The data entry is already done.
♦Not only do I want to see my net income month to month, I examine my gross margin. I review my overhead expenses to see if there are any changes. My marketing expenses are much higher than last year but that’s due to a new advertising campaign. We’re keeping our travel expenses down so we can afford to allocate more money to advertising.
♦Net profit? Check. Budgets? Gross margin? Check. I saw that we were selling very high quantities of product A and fewer of product B and we only had a limited amount of advertising dollars. Due to the fact that I can see each product and their individual profitability, I saw that product B had a much higher profit margin so we dedicated our advertising dollars to sell that item. Instead of focusing on the more popular but much less profitable product A.
Not all businesses need to be at the most detailed level. If it costs more time and money to get that level of detail than there is to be made off the products, then knowing your gross margin is fine. However, if you don’t know how much money you are making on what you are selling, you can’t make informed decisions about how to manage your overhead expenses. The more you know about your business’s financial health, the more you can plan to reduce your tax liability, increase or reduce staff, control advertising or travel spending, and grow your business. Another benefit is making tax time much less stressful. Having your numbers done each month means far less work at the end of the year.
Your income statement isn’t the end all be all either…..if you aren’t collecting on those sales, your net profit won’t help you. Your statement of cash flows is another helpful tool in managing your business. More on this later.
Contact CMK Financial Services for a free financial health check and see if you could get better information to run your business!