“It’s hard to see the forest for the trees.”
Simply put, you have focused on the many details and have failed to see the overall picture or key point. Often times as a small business owner it is difficult to see the forest for the trees. Especially when the situation(s) has to do with lost revenue, low cash flow, poor net income, or negative gross margin. Day to day operations can fill an owner’s time up with an endless number of tasks. After fulfilling all of these duties and feeling exhausted, one usually does not want to pour over financial statements. This is a big, big, mistake.
No doubt this is something many do not consider to be a favorite post-work activity, but it is crucial to keep a close eye on the critical numbers that can help predict the success of your business. Every business owner wants to stay in the black, but without knowing what to do to stay there is flying blind.
Below are 5 financial numbers every business owner should know:
- Cash flow. When your operating cash inflow exceeds your cash outflow, this is a sign that you’re operating in the black. If the reverse is true, take a closer look at your income and expenses.
- Profit and Loss (P&L). Knowing and understanding your company’s profit and loss over time allows you to project earnings and make realistic short term and long term plans for the future.
- Sales. It’s a given, but must be said. Watching your sales closely can help understand why there is a dip and take corrective action. It also allows a business owner to react quickly to an increase in sales, which helps determine what is needed to keep going to sustain that growth.
- Price Point. A small business owner must know exactly how much it costs them to purchase their goods and then how much they’ll need to sell those goods or services in order to make a profit. For restaurants and retailers, this is especially critical. When determining price point, always take into account overhead expenses –such as utilities, payroll, and sales tax.
- Gross margin. Sometimes called gross profit -and closely related to price point- this figure reflects how much money remains after the actual cost of your merchandise is subtracted from the selling price. If this figure is low and not sufficient to cover operating costs such as salaries, rent, marketing, and utilities, then you’re likely not charging enough for your products and services.
Don’t be afraid to seek an objective third-person viewpoint when analyzing these financial numbers. A consultant can come into a business and address the obvious truth that is either being ignored or unaddressed (i.e. the white elephant in the room). While methodology will differ, a good consultant comes in to listen, has no agenda, becomes a worthy partner in the financial aspects of the company and always understands that it is about your company and not the consulting firms.
Finally, always seek a consultant that is truly interested in your business and seeing it succeed.
