Consult the income statement, the monthly balance sheet
I love reading my children’s newsletters and making them sweat like I did when my mom and dad went through my newsletter.
The truth is, their newsletters are, for the most part, better than mine. The professors’ comments are certainly much nicer.
But why tell this to my children?
If you are in business, you need a newsletter. Many business owners I know look at the one report they care about: their bank statements. And often they don’t even look at the statement – they just check their bank balance when they make a deposit.
Many small business owners base their important decisions on what’s in the bank on any given day. It is a problem.
Cassandra contacted me some time ago. She and her husband owned a hardware business, but their interests lay elsewhere. They handed over the management of the business to his brother-in-law. After two years, the brother-in-law decided he didn’t want to run the business and quit.
This left Cassandra in a bind. She, her husband and their children had moved 1,100 km away. Back in business, she realized that the accounts were in disarray. The taxes had not been deposited, the end of the year was not over and the bank account was empty.
Sales were down and as a result Cassandra and her husband could no longer maintain their lifestyle. They had never needed to consult financial statements before. They thought everything was fine but inadvertently emptied the bank account. They were in big trouble!
The bulletins that you should consult regularly are your income statement and your balance sheet. You should receive both of these documents from your accountant on a monthly basis.
What should you watch on your income statement?
Income / sales income: Are sales increasing or decreasing? What percentage? Do you have certain departments that are growing or declining compared to the previous period? Why is this happening? What are the trends in the business? Are you doing something different that is helping or hurting sales?
The more you can figure this out, the more likely you are to be successful.
Cost of goods sold: Look at each line of your income statement. What has changed compared to the previous period? Can you explain the changes? Are there any input costs that you can reduce?
Gross profit: Look at the percentage of gross profit compared to the previous period. Has it increased or decreased? If it’s down, you might need to make some changes to make sure it doesn’t continue. What needs to be done? If it goes up, good for you. Consider what you did to make this happen. Can you continue to do this?
General and administrative expenses: Compare this area carefully – line by line – to the previous period. Have expenses increased? Why? What needs to change? Are there areas where you can cut costs? Remember, every unnecessary cost that you can reduce goes straight to your pocket as a homeowner.
Profit: Compare your profit for this period to the previous period. Are you heading in the right direction? Did you reach your profit target? Are you happy with this number or discouraged? What must happen for you to reach your goals? Remember you own the business to make a profit. This area is particularly important.
Your assessment: It’s pretty straightforward. When you look at your balance sheet, you need to know how much money you have in the bank. Your Accounts Payable – How Much You owe others. Accounts Receivable – How much people owe you. You might want to take a look at your long and short term debt to see how much money you owe on loans (although you might want to block that from your mind).
Like Cassandra, you ask for trouble if you don’t know where you’re from, where you’re going, or how well your business is doing.
It’s like driving a car without a fuel gauge. Or like a sports team that only finds out at the end of the season whether they have won or lost games during the season. You wouldn’t play sports or games without keeping the score. Why play roulette with your business without keeping a score?
Make it a point to keep track. Get these monthly newsletters from your accountant or accountant!
Dave Fuller, MBA, is an award-winning business coach and partner of Pivotleader Inc.
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