Do you use your financial reports to help you make management decisions for your company? I’m talking about Profit and Loss Statements, Budget Variance Reports and things like that.
Most business owners I work with say their primary goal is to increase their bottom line. My next question is always, “How do you plan to do that?”. More often than not, I’m met with either a bewildered look or the blanket statement, “We have to increase our sales.”. While increasing sales should always improve your profits, it’s not always the only solution and quite often it’s the most difficult!
Streamlining and fine tuning your business based on financial changes can give you results that you might not have even known were possible. BUT, you have to keep a close eye on the numbers, understand them and adjust when necessary. You’d be surprised (or maybe you wouldn’t because you’re guilty of it too) how many owners only look at their P&L once a year, see that it’s better or worse than previous years and move on about their daily grind.
Do you know what percentage of revenue your labor is costing you? What about materials, insurance, facilities, marketing etc.? Have those expenses increased, decreased or stayed the same? If there has been an increase, why? These are all questions you should be asking yourself.
Think about it this way, if you have ten different expenses that have gone up by just 0.1% in relation to your revenue and you can get those back to where they were, your bottom line will increase by 1% of your revenue. If your revenue was $1 million, that would be $10,000 in your pocket with no increase in sales! Of course, sometimes you can’t do anything about those increases (like if your material costs go up) so the next thing you’ll need to look at is your pricing.
Chances are, if you don’t regularly watch your numbers, you’d never notice the subtle increases and could be giving that money away. But if you do watch them, it can help you determine when and what costs need to be cut as well as whether your pricing is right. A good rule of thumb is to set your profit percentage at a fixed number (be realistic here!) you’re comfortable with, and adjust everything else to keep that consistent.
Using your financial reports as a tool to assist you in decision making is a must! After all, “If it don’t make dollars, it don’t make sense”[sic].
The Effective CEO 