Urban Thought Collective

Understand Your Company’s Financial Statements: Part II

Your labor costs are 50% of sales, gross profit is 20% and net income is 1/2%.

What does that mean?

What’s wrong with posting a loan you received from your favorite bank to your books as income?

Last month’s column provided some tips and resources related to financial statements for publicly traded companies.

This month’s column highlights some ideas for small businesses.

If you’re in need of a loan, budget, taxes filed or potential investors you might feel that you need help in interpreting your data so you can make some better informed decisions.

Yes, it’s time to break out the financial statements that you’ve been keeping on your computer for your business and consider resources available to you.

How do you start interpreting your records?

If you do not have a professionally trained accountant internally preparing your financial records, consider having a CPA or qualified professional bookkeeper visit your financial records and provide the “clean-up” entries if needed or enter the adjustments for you.

Ask your accountant to walk you through the financial statements highlighting the key numbers you should be watching and trends to consider for your industry.

What if you’ve been keeping manual records or the 12 bag-method of accounting?

Quickly go on-line or to the nearest office supply store to pickup a software program to process your business records. Check with advisors or if you belong to an industry association such as the Bar, Realtors or others ask for recommendations and referrals.

Simple software programs such as QuickBooks, Peachtree or another industry specific program can help you process your data on a regular basis.

What might our records tell us about our company?

Imagine you’re a beautician, what makes you more money, a perm or a dye treatment?

If you’re a professional speaker, is it better to perform a customized session for fewer than 20 participants or a general gig for 100 participants?

It depends!

If you track your financial records to keep up with direct costs related to various revenue sources you can track data and create some budget models that will help you make a decision whether or not to accept certain projects and standardize your bidding and project cost projection process.

Gross revenues versus gross profits

Where many entrepreneurs have challenges is accepting too many low profit-margin projects.

Concentrate not just on the gross revenues collected from projects but the gross margins (difference between gross revenues and cost of goods sold/direct costs).

Are you a low-cost leader or a high-end provider?

Again, understand what a project costs you internally including time deployed and associated supplies and make informed decisions on your strategy.

Hopefully the take away for this segment is that as a small business you don’t have the ability to float very long without taking action to plan for profits. Unless you have angel investors available to provide unlimited funds, you must remain profitable and positioned for growth.

Genevia Gee Fulbright, CPA is President & COO of Fulbright & Fulbright, CPA, PA, a business strategist, tax advisor and author of Make the Leap: Shift from Corporate Worker to Entrepreneur and most recent book Make the Leap: From Mom & Pop to Good Enough to Sell (Infinity Publishing). Her sound financial planning advice tips can be read regularly on www.urbanthoughtcollective.com. Visit Fulbright at www.makeleap.com.