Finally Understanding Your Numbers
Business owners always ask us what they need to know when they look at their financial statements. What does this piece of paper tell me? How is my business doing? Sometimes it feels like they are asking you to tell them how to run their business. The challenge so many business owners have when it comes to their finances is they simply do not know what they do not know. There is no right or wrong answer when it comes to running your business.
Here are some steps to help you maximize your financial resources:
- The first step of understanding your finances is to analyze your financial statement and tell where you are at. If you want to get from point A to point B, you first need to know where you’re starting. Your financial statement is point A.
- You need to be able to see what numbers can be improved next month and outline some ways to make it happen. This will get you to your point B.
- Turn that outline into actionable steps; turn those actions into measurable financial results. This is the step of applying your knowledge back to your business.
Example 1: A restaurant owner gets his financial statement, for the second month in a row, his food costs are no longer 30%, but 32%. He reads this and translates it as his food costs are rising 2%, and his margins have shrunk by 2%. He decides to change this by adjusting his prices and reprinting his menu. The next week, his restaurant uses the new menus, and his sales increase by the amount he raised his prices to. His food costs go back to 30%, and now he’s back to operating according to his budget.
Example 2: A restaurant owner is losing 5,000 a month. The owner learns that he can have a profit of 40k by increasing sales 25,000 a year, controlling the cost of goods sold to 50%, and holding his operating expenses to last years. To hit his 40k profit goal, the owner realizes he needs 20 customers a day based on his average dollar purchase per customer. By spending his days controlling inventory, scheduling, pricing, and recording foot traffic in the store, he will hit his end goal, turning actions into results!
Since this restaurant owner knew exactly what to look for and where to look, he could get back on track. Let’s look at some of the skills this owner would have to know to make decisions like this:
- Understanding the language of business (Accounting)
- Reading and analyzing your statements; understanding the story your numbers are telling you
- Applying your skillset > Executing them
The first step taught him what to look at. After looking at it, do you know what it means to understand your business’s financial performance? Can you read a cash flow statement? Can you look at a financial statement and tell what is right and what is wrong?
Once you can speak the language and understand the story your numbers are telling you, you will have a better understanding of where you’re at and how to move forward. This is where the restaurant owner increased his prices and brought his food costs back into line with new menus.
Here are some management tips that are helpful in running a small business:
- Learn how to read a financial statement
- Calculate your break-even point
- Re-calculate your break-even point for costs to grow or cash outlays
- Project your cash flow 6 to 8 weeks
- Put a budget together
- Develop a sales budget and review pricing
Many people go into business because they are a great painter or plumber. They have the required technical skills to deliver their product or service, but few have the skills and tools to effectively run a business.
To get your small business to the next level, you must read and understand your financial statement numbers. Know what your numbers are telling you and be proactive in the areas that require attention. By finally understanding your numbers, your company can develop a budget and make any necessary adjustments along the way.
To learn more about obtaining and implementing these skills and tools in your business please contact us or call 262-796-1040.
Recommended Classes to learn more: Business Essentials, Cash Flow Essentials, Cash Flow Fundamentals, and Numbers Mastery Series