A standout amongst the most important lessons that unprepared entrepreneurs learn after ruthlessly being consumed is the importance of knowing their numbers. Not knowing your company’s numbers is similar to driving from New York to California without a map.
The fact is that numbers tell the real story of a business. In the event that you want to be successful at managing a business then you must have the capacity to understand certain numbers such as your profit and loss statement. This statement determines the health of your business. Just because you work hard 10 hours, 6 days a week doesn’t mean you’ll make a profit. Businesses with 5 employees working 10 hours a day, 6 day’s a week can still be unprofitable and still go out of business.
There are 2 major areas of owning a business.
- Knowing your trade or craft
- Knowing how to read your P&L Statement.
The profit and loss statement (P&L), also known as the net income statement, shows if your company is making a profit, breaking even or operating at a loss. Obviously you want your business making a profit, yet in the event that it isn’t showing a profit, there are some key factors influencing that number that you have to pay attention to.
Lets take a gander at some important numbers and what it takes to enhance the bottom line. When you learn how to read a profit and loss statement and use it to your advantage, the faster you can pivot a business and generate profits. I highly suggest hiring a CPA or EA for this task.
Some of the key areas to look at:
Pricing – How you value your products/services has an immediate impact on your bottom line. First, you have to know the exact unit cost (labor, materials, and so forth.) for each product your company sells, which is known as cost of goods sold (COGS). The cost of your product must be higher than your unit cost if your product is to be profitable (mark up percentage).
On the off-chance that you find that your pricing doesn’t cover the cost to make your product or is way underneath a percentage target, there are some changes you can make. First, consider raising your prices, however just do as much on the off-chance that you can still remain focused and your customers are willing to pay for it. In the event that you find that your product is under valued compared to your competitors, then raising your cost is definitely something worth considering.
Many new business start-ups start with 0% mark up plus their hourly rate to get into the game thinking that they require a foot in the door in order to get any business. You realize what happens then? They all call you back 2-3 years later wanting the same prices. You need your hourly rate and mark up at a rate that will keep your doors open. Are you in business to make a profit or in business where you enjoy breaking even and working 60 hours a week?
Second, know the amount others are selling the same product for. If you can’t sell your product at a sufficiently high cost to be profitable, then you may need to consider dropping that product from your lineup. Try not to become involved with losing cash and trying to make up for your losses in volume. On the off-chance that you start selling another line, you may be the one and only selling it, providing another choice for your buyers.
Gross Margin – If you take the total sales that you generate (total sales) minus the cost of goods sold (COGS) you are left with what is known as gross margin, also known as gross profit. Keep in mind, your company runs on gross margin, not net income! Net income is what is left over after all the bills are paid.
The gross margin is what is used to pay all the operating expenses and variable expenses of the company. Typically, the expenses include – yet are not limited to – rent, payroll, insurance, office expenses, advertising, taxes, and so on. So in what capacity can you ensure your business will generate a sufficient gross profit margin to pay for all the operating costs and variable expenses of the company? As you dial in your prices over time as compared to the competition, your character, personality, and personal follow-up and your sincerity will play a significant role. It’s not all about the numbers.
Other factors that impact your bottom line are your company’s expenses. Work at keeping your fixed expenses as low as possible. Some variable expenses are much easier to control and scale back if necessary during slow months, such as advertising and marketing expenses.
The profit and loss statement reveals whether your company is generating profits, breaking even or losing cash. Focus on delivering positive numbers on a consistent basis; it is the way to your long haul success. If you do have an existing profit and loss statement you can go to www.theLPsolution, select “Profit Generator“, enter your existing profit and loss numbers, and play with your own numbers. Find out what income your company will make by adjusting your hourly rate by pennies, adjusting your cost of goods sold by a certain percentage and so much more. Do you know how much more money your company would make if you raised your hourly rate by 18 cents?? A company doing $500k in sales per year……$800. How much for 2 dollars??