By Eric Grimstead
For The Bellingham Business Journal
While reviewing financial statements may not be your favorite thing to do, it’s important to keep a close eye on the financial drivers that can help you avoid a train wreck.
To help ensure that your business stays out of financial trouble, take the time to familiarize yourself with the following financial statements and mission critical numbers behind them.
1. Profit and Loss Statement:
Most business owners are at least familiar with the P&L. This is a snapshot that shows your company’s profitablity, or lack thereof, over a period of time. In short, you take your income, subtract your expenses, and what you are left with is a bottom line result that is either positive (a Profit) or a negative (a Loss).
2. Cash Flow Statement:
Closely related to the P&L, but often misunderstood, is the Cash Flow Statement. When your cash inflows exceed your cash outflows you may say that you’re operating in the black. If the reverse is true, it’s time to take a look at where things might be going off track. A common example of this is when a company is making lots of sales but customers are taking too long to pay. In this case, the P&L may show that you are profitable for the period. However, because the cash that should be in your bank account is stuck in Accounts Receivable your cash outflows may be greater than what truly flowed into your company.
3. Balance Sheet:
The balance sheet tells the story of What You Own vs. What You Owe. What is critical to understand is the relationship between your assets, your liabilities and the owners’ equity of a business.
4. Gross Profit Margin:
This figure reflects how much of every dollar you make in sales remains after the actual cost of your goods is subtracted. If you sell an item for $100 and it costs you $50 to purchase that item then your Gross Profit Margin is 50%.
5. Fixed Overhead Expenses:
These costs are all the expenses you have to cover regardless of how much revenue you generate. Examples would include rent, utilities, insurance, business licenses, etc. Once you know your fixed operating costs you can then determine the following…
6. Break Even Point:
If your fixed overhead expenses total $5,000 per month you simply divide that $5,000 by your Gross Profit Margin of 50% in our example above and you will see that you must make $10,000 in gross revenue to break even.
There are many other financial numbers that can help you understand what drives your business. This article simply serves as a primer to get you focused. If you would like help understanding what your business numbers are telling you, the SBDC is here to help. In addition to helping you understand your own numbers we can also compare your firm’s results to your peers in your specific industry. This financial analysis will give you a quick snap shot of where you may be outperforming your peers or where there could be some room for improvement.
Eric Grimstead is a certified business advisor with the Small Business Development Center at Western Washington University. The WWU SBDC provides no-cost business counseling services to Whatcom County businesses.