Learn to read your business books like a pro!
Recently, a QWEEN came to our consulting team to seek advice for her home based beauty business. As part of our initial analysis we asked for her financial statements for last three years.
She gave us a huge ring binder containing her monthly receipts,yearly balance sheets and cash flow projections. There were pages marked “ Profit & Loss statements” and the crisp, untouched feeling of pages revealed that this QWEEN never used her financial statements to run her business.
The whole folder was nothing but a statutory requirement to her!She was not the only one. We often find businesswomen reaching out to us for advise on how to help their business grow and they clearly show lack of understanding their own books of accounts. Most women follow what their husbands, or their husband’s or family’s accountants ask them to do.
For all those sailing in the same boat, here we have 6 quick tips on what exactly to read when you get your own binder next time.
- Profit & Loss statements cover a period of time- These statements show how much money you made over a period of time. So if your business started in –say – January, your first income statement would be from January to March, as India follows an April –March calendar. If you are partnering with someone else, it makes sense to read their profit and loss statement in this perspective.
- Same item can be called by a different name- A profit could be “net income” for someone. Sales could be revenue or gross receipts, even income. Expenses could be called costs. Its like naming your baby. Whatever you do, make sure the name is same, year after year.Multiple names of same item can cause complexity.
- A simple formula is the basis of every profit & loss statement- It also defines what are the key elements of a profit & loss statement. Which is
Revenue- Costs= Income
Gross Income- Costs= Net Income
If math was never your favorite subject , and these formulas intimidate you, remember that the money you get to keep is actually money that comes in minus the money that goes out.
- Don’t get thrown away with the jargon- Yes there will be heavy words for women coming from a non-commerce background. Some of these words which are a common feature are-
Revenue- as explained above is sales (money that has come in)
Cost of goods sold- It is the essentially the expenses that you incurred on the product. For example, for a beautician they will be the cost of beauty products that she purchased from the market, for a baker they will be food items and cooking products etc..
Gross Profit- Basically it means the part of income (money that came in) after you deducted cost incurred in buying the goods needed to sell the product. In the case of beautician, for example, her net income would be the money she got for a service minus the cost of the products that she used.
Selling, general and administrative expenses- These are the costs that you do not directly incur on creating a product but they are essential to run the business- like setting a shop, electricity, phone, business promotion etc come in this category. Bear in mind that they are mostly fixed expenses, which you have to bear, irrespective of whether you are selling the products or not.
Profit- Finally we come to profit or net profit or net income, which is after deducted all types of costs from total sales/revenue.
- The most important health tracker of your business- If you read point no 4 clearly, you would know that Gross Profit is going to be the most important indicator for your business health. The % of gross profit to sales remains largely constant, since it shows that the material you invest in making your products is moving with your sales. You are not piling up on goods, or raw material which is not getting sold or converted to sales. For a beautician, it could mean pushing the products that are not very popular, or discarding products that are too expensive and rejected by clients. For a baker , it may be the time to check which flavours for example are not very popular.
- Finally- Keep your other expenses in check- Money spent on selling, general and other administrative expenses should be constant. You cannot run a phone bill of say Rs 5000/- increasing to say Rs 7000/- next month! If you are meticulous about keeping these costs fixed, your net income from business can become more predictable and giving you a better future cash flow projection!
Learning the basics of finance is all the more important owing to easy funding available through banks and non-banking finance companies. So make sure that you get your basics right.
with inputs from:
Pic courtesy- hdfclife