Know your numbers to know your business. We say that all the time around here. Obviously I run a financial planning firm, CWOs for Hire. We also have a CPA firm, CPAs for Hire. And if you go to that website, http://www.cpasforhire.com, you will see right there on the front page, know your numbers to know your business.
It’s really hard to know how your business is doing if you have no idea how to read the income statement or the balance sheet. Now from an accounting perspective, we are, we’re focused on the balance sheet, too. We have to make sure that’s clean. That’s the starting point. But as the business owner, it’s really important that you understand the income statement and also how to prioritize the decisions around your business, based on an income statement.
To keep things simple, I would say go from the top down. If you look at an income statement, you’re going to see your total sales on top. You’re going to see your cost of sales and your gross margin right underneath that. And then everything else are all the admin expenses of the business to get down to your net income. So as you think about running your business and what the priorities of the business are from a management perspective, always, sales are the biggest focus. Why? Well, it’s kind of like oxygen. If you don’t have oxygen to breathe, you die. Same thing with a business. If you don’t have sales, if you don’t have that revenue number, there’s not a whole lot you can do with the business, right? It doesn’t really matter what everything else is doing if you don’t have the sales of the business. And that’s not to say, oh gee, you should just be going for sales at all costs or try to squeeze people for every dollar they have. That’s not the point, obviously. But you have to recognize that, as you are setting aside time in the day, as you are prioritizing your tasks and what you focus on, the top of the income statement has to be the top of your priority. That is the oxygen for your business. It’s what is your sales? Is your sales growing? Are they declining? Are they stagnant? What are your sales? That has to be the primary focus. And the reason I say that is because we’ve talked about how sales are at the top of the income statement and down towards the bottom of the income statement are all the admin expenses. Those are important, too. But I’ve seen a lot of business owners spend a ton of time trying to figure out how to reduce the admin, make things more streamlined there, and that’s all really good. But without sales, it doesn’t mean a thing. So first and foremost, make sure you have sales.
Secondly, the second most important are just down below the sales, are your cost of sale, so cost of goods sold, and your gross margin. Your gross margin is just the difference between your sales and what it costs to make that sale. That’s gonna vary by business, really. If you’re making shoes, obviously the materials that go into making the shoe, the labor that goes into making the shoe, that’s all in the cost of sale. If you are a consultant, or a lawyer, or dentist, doctor, somebody in kind of more of a white collar profession, most of the cost of your sale is going to be in the employees delivering the service. Now you may also have some software, or some other things that go into that cost of sale. But the cost of sale is just what it says. It’s anything, any cost that is applicable directly to whatever it is that you’re selling. So, that’s the second priority. Now the reason that’s the second priority is because that’s going to be the biggest number and have the biggest impact on your business.
Then below that are all the admin costs. And again, these are important. Yes it’s good to be running efficiently. It’s good to have low overhead if you can. It is important, but we have to make sure that we are running our business in priority order, where we say all right we’re not gonna stress ourselves out over how can we save $20 a month on some software subscription, when our sales are declining. We have to have proper perspective running the business. We have to first know what the numbers are, make sure that the numbers are clean and make sense, and then we have to make sure that we are spending our time appropriately to those numbers. So, two steps. Get the numbers right, get them clean. And if you can’t do that, work with an accountant that can. And then secondly, spend your time appropriately. Focus first on sales, then on the cost of sale, and then, assuming you have those two things nailed, turn to the administrative costs and make sure those are in line. That will get you to a good net profit, it’ll get you to a steady business, and it will relieve a lot of stress that you have over how the business is doing and how the business will do going forward.