It’s safe to assume that you went into business to turn a profit, but how much profit are you actually making? Do you know your costs down to the penny? Have you crunched all the numbers to ensure you’re on track to not just profitability but growth?
When you run a business, there are certain financial basics that you must get right before you can even think about expanding your business, opening new locations, or selling franchises. Without the following fundamentals, any growth you see might be misleading.
1. Financial statements
According to financial experts at Workiva, there are four types of financial statements you need to be familiar with:
- Balance sheets
- Income statements
- Cash flow statements
- Statements of shareholders’ equity
Each of these financial statements is required to see the bigger picture regarding the financial wellbeing of your business. However, it’s important to note the information contained within these statements is historical only.
Here’s a brief summary of each type of statement.
Balance sheets
A balance sheet is an itemized list of everything your company owns. This includes your assets, shareholder equity, liabilities, and anything else you may have. You can derive the total monetary value of your business from your balance sheet.
Income statements
This is your profit and loss statement that explains what your organization did with earned and spent money. For the period of time for each income statement, you’ll document your revenue, expenses, gains, and losses in detail.
Cash flow statements
A cash flow statement reveals how your organization uses the revenue you generate. This is what investors and shareholders are looking for to determine if you’re being effective (and lean) with your spending. A healthy, consistent cash flow will attract more investors.
Statements of shareholders’ equity
Last but not least, shareholder/stakeholder statements outline any changes in ownership interests. The purpose of this statement is to show investors why their equity has increased or decreased.
This financial statement can get pretty detailed to include all the specific types of stock being held as well as the changes in price for investments that haven’t been cashed in yet.
2. Labor costs
Knowing how much you’re spending on labor is crucial to running a successful business. Even if you’re only staffing the bare minimum number of people to get through each day and have absolutely no choice regarding your staffing requirements, you still need to know what it’s costing you.
Appropriate labor cost percentages vary by industry, so you’ll need to do some research to find out what’s considered standard for your type of business. However, you need to know your actual costs because if it’s too high, you’ll know you need to take action to reduce your labor costs. For example, you might find out your employees are working unapproved overtime, and if that’s the case, you can crack down on this practice to make it stop.
3. Cost of goods sold (COGS)
Your cost of goods is one of the most important financial numbers to know. The cost of goods sold is what it costs you to sell a product or service in order to break even. For example, if you sell screen-printed t-shirts, you would calculate the cost of obtaining your blank t-shirts, the cost to have them printed, all packing and shipping materials, and postage.
The only way to know if you’re making a true profit is by knowing your cost of goods sold. It’s also a way to know if you need to adjust your prices higher or lower. For instance, if it costs you $2.50 to create something you resell for $3.00, that’s not much of a profit. In this case, you should raise your price to at least $3.50, if not more. If raising the price makes the item not sell, you should consider eliminating it because it’s not profitable.
4. Tax laws
The importance of knowing tax laws can never be underestimated. You don’t want to make any mistakes with your business’ taxes because the penalties can be steep. If knowing every last law and regulation regarding filing your business income tax returns isn’t your cup of tea, you can always outsource the job to a professional A. In fact, that’s actually the best thing you can do for your company.
A solid financial foundation is the key to profitability
When your main goal is to turn a profit, don’t skip the fundamentals related to your finances. If you’re overwhelmed by having to track and manage your own financial data, hire an expert for the task.