Managing Your Business’ Bottom Line11/05/2018
by Dominic Scarano Jr. CPA, CGMA
I had the pleasure of speaking at the Better Business Summit presented by the Connecticut Better Business Bureau in Cromwell in October. Since this information can be valuable for nearly any business owner or manager, I wanted to share it here as well.
Regardless of how many products you sell, or how many services you offer, it is vital for all business owners to manage their bottom line in a way that ensures the longevity of the company. To do this successfully, there are a number of factors you must consider and areas you have to manage.
Don’t Rest on Your Laurels
Starting, growing and managing a business is not for the faint of heart. It takes a tremendous amount of time, energy, money and effort to build a successful business. So, it is understandable that once you have reached a point where you are comfortable, to want to sit back and enjoy your accomplishment, right? Not so fast! Regardless of the type of business you have, change is inevitable and the environment in which you work is very likely in flux. New competition enters the market. The demand for what you do, or sell, goes up and down. Advances in technology allow for efficiencies in production. Change is inevitable and staying on top of these fluctuations in your industry and business’ ecosystem can greatly impact your success. Therefore, you should always be learning and ready to adjust as needed to remain prosperous.
Always Be Growing – Both Top and Bottom Line
Customers come and go, and even your best ones may not stick with you forever. That is why you should always be in business development mode. Have you thought about ways that your service could benefit different markets than those you currently serve? Are their current clients who are simply not worth keeping that you should look to replace with new ones? Are your products priced appropriately or is it time to increase what you charge? Or are there ways that you could decrease your expenses so your margins are higher? There are so many moving parts to running and growing a business, and you need to stay on top of all of them.
Mange Cash Flow
If there is one factor that will force a business to close, it is not properly managing cash flow. While revenue and profit are also important, on a day-to-day basis, if you don’t have good cash flow you won’t be able to continue operating for long. Do you have a business that is seasonal in nature? Look for ways to smooth out your revenue so you don’t run short in the slower months. Do you have a solid understanding of your overhead costs? If not, it is time to create a budget that includes everything you spend each month and to carefully analyze it for any areas that need to be adjusted or addressed.
Understand Your Financial Statements
If you are like most business owners, you didn’t start a business so you could review and analyze financial statements all day long. But every entrepreneur needs to have a keen understanding of the three main financial statements so you can make informed decisions and run a successful enterprise. While there are other reports you will want to review from time to time, you should always have a good idea of what your balance sheet, income statement (profit & loss) and cash flow statement contain.
Your balance sheet is the quickest way for you to see what you have, what you owe and what you own. It is a snapshot, of sorts, of your business’ financial position. This document is very important when you are looking for things like financing, bonding, investors or potential buyers.
Your income statement, also referred to as Profit & Loss (or P&L) reports your financial performance over a specific period of time. It will include your income and expenses, so you can get a picture of your net profit. While a balance sheet provides a picture of your company’s financials on a particular date, the income statement reports income over a particular period of time.
Statement of Cash Flow
We mentioned how important cash flow is to a business, so keeping on top of this one is essential. This statement shows where your money comes from and where it goes each month and allows you to stay on top of how much is spent in the various areas of your business and operations.
While it may not be the most exciting part of being a business owner, some would argue that remaining current with all three of these statements is one of the most important to success. With an understanding of the above statements, this would allow for possible tax planning opportunities for savings at both the Federal and state level.
If you have any questions or need help creating and understanding these documents, don’t hesitate to call us for help.