All I have to do is buy or make something and sell it to someone who wants or needs it. Simple. All you had to do was establish a legal business structure, set up an account with the State Comptroller’s office, find a business location, and obtain some financing. You jumped through some hoops to get all that done and now you are in business and you are doing well. Or are you? How do you know?
Many new small business owners never print any kind of financial statement until the end of the year when they have to file a tax return. They have gone 12 months without knowing if they are making a profit or showing a loss. They have been operating in the blind. It’s kind of like flying an airplane with no gauges or windows, except once a year. Operating this way assumes that as long as you are still flying, everything must be good. The problem is that you can’t tell if you’re on course, or if your altitude is sufficient to keep you from running into mountains, or if your speed is sufficient to maintain flight.
Every business should be printing, reviewing, and analyzing their financial reports on a monthly basis. These reports let the business know if they are profitable on a month to month basis. Analysis can show if any expenses are running too high, or if sales are running lower than last year. Reviewing reports on a consistent basis allows the owner to investigate the “why” of everything.
Why is my profit margin shrinking if my sales are growing? Why did I not make a profit this month when I did in the same month last year? Why am I buying this amount of that product, when I am not selling that much of the product?
Reviewing financial reports also offers the opportunity to ask and answer, “How?” How can I improve my gross and net profit margin? This usually leads to the question, “Where?” Where can I reduce expenses or increase sales to improve those margins?
Monthly analysis of financial statements also allows the business owner to monitor and examine trends such as the effects seasonality may have on their business. Such knowledge can affect decisions on staffing, inventory levels, and promotions. So, knowing “When?” is important to the owner also. The final question the business owner will be able to ask is, “What?” What am I going to do with what I now know?
Being able to ask all of these questions on a monthly basis, the business owner has the information he or she needs to make continual adjustments to their business as their needs require. Much like flying a plane, the business needs frequent, consistent monitoring to ensure it is on course and operating at profitable levels. When was the last time you looked at your financials?
“Business Tips” was written by James Leavelle, Senior Business Development Specialist of Angelo State University’s Small Business Development Center. For more information on the topic of this article or the services of the ASU · SBDC, contact him at James.Leavelle@angelo.edu.