Let’s dive a little bit deeper into a topic that comes up really often in our Profit Plus program where we empower business owners with the information they need to make their businesses super, super profitable.
One of the things that comes up a lot is:
“I’m so confused looking at our financial statements each month. What are the basic need-to-know numbers I should be looking at?”
Really, really great question. So there’s a couple of key numbers that I feel are super important in running a business, and these numbers will come from your profit and loss statement.
Go into your accounting system … Hopefully, you have an accounting system. If you don’t, you’re going to need one. You want an accounting system so that you’ve got all your financial information and you’re accounting for all of your operating expenses.
Run a report called a profit and loss. It could also be called an income statement. Ideally, you want to run this for a year-to-date. If this is early in the year, you could absolutely run it for the previous year-to-date so that you have a window of information to take a look at.
I often like to take a look at a longer history, at least going back a year, and then I like to take a look at the previous full month-to-date so that you can see historically how you’re doing versus in the short term how are we doing month to month.
The top number that you want to take into account is your total income. How much are you selling for the date range of the report? Using this number you can determine if you are on track for your annual sales goal.
Take that number, divide by the number of months in your report, and then multiple by 12. For example, if your sales are $250,000 in the first quarter, that’s 3 months. Divide $250,000 by 3 which is $83,333. Then multiply that number by 12, which is $1,000,000. What this says is if sales remain the same you are projected to end the year at $1M sales.
This will give you a projected annual income and it will help you know if your sales are trending up or down. Better to know this EARLY so you have time to do something about it if sales are trending DOWN.
Cost of Goods Sold
The second number you absolutely want to be keeping an eye on is your hard costs or your cost of goods sold. That’s the next section on your income statement or your P & L, and you’re going to see a block there for total cost of goods sold.
That’s the money you have to pay out so you can deliver your product or service. If your cost of goods sold is completely out of line, that’s going to be taking away all the money you have to run your business, and if you’re having trouble making payroll or paying off your vendors, that may be why, your cost of goods sold is running way too high.
Once you take a look at that number you can actually figure out what percentage your cost of goods sold is of your total income, and once you have that, it’s a good indicator of where are we at. If your cost of goods sold is 80% of your total income, you’re not going to have very much left to run the business, and you’re going to want to focus your efforts on reducing your cost of goods sold.
The third number you want to look at would be your operating expenses. These are going to be all of the things like payroll, rent, utilities, software, maybe equipment leases, things like that. You’re going to want to know what your total monthly overhead is. Why? Because this is the biggest area where businesses lose money.
As the company gets larger, we tend to get lazy and start throwing money and people at problems. Those people cost money. Expenses can easily begin to pile up until there is just no money left in the bank. In our Profit Plus program we teach entrepreneurs how to run their business on specific percentages for operating expenses.
Finally, the last number (and most important) to look at is the bottom number, profit. In a nutshell it’s the money left in the bank at the end of month. Based on our income at the top, less all of our hard costs, minus all of our operating expenses, what really and truly is going to be left in our bank account at the end of the month is profit.
Profit is the difference between being able to easily pay your bills, and struggling to meet ends meet at the end of the month. It’s the difference between taking a vacation or slaving away at your desk.
If you had to pick some key numbers to really be watching, those are the ones that I would be keeping my eye on. Yes, there’s lots of other numbers in there, but those are really, really the key, and those are the ones that are going to help you the most to be so much more empowered to run your business and make super smart financial decisions.
What’s Next: Do you need help? Schedule a call with a Profit Advisor. Our complimentary one-hour session is the first step towards having a financially solid business. Schedule a call today.