“Money is a terrible master, but an excellent servant.” ~ P. T. Barnum
You need money to pay your workers, pay the rent, buy supplies, and pay other overhead. Money provides the business owners’ lifestyle and is essential for the business to be able to continue. Without enough of it, your business dies.
Your understanding of money is crucial because you must have and understand money to survive for any length of time.
Knowing the Numbers
If you want to plan effectively, as a business owner or professional you must “know the numbers.” Knowing the numbers means that you fully and completely understand the financial aspects and financial condition of your business.
Below is a list of the financial facts you must know about your business:
1. Gross income: the amount of total income from all sources.
2. Gross expenses: the total amount of money spent to run your business except for income taxes. Gross expenses include wages, salaries, cost of inventory, phone, office supplies, etc.
3. Net income: gross income minus gross expenses. Sometimes this is also called gross profit.
4. After-tax income: net income minus anticipated state and federal income taxes for your business. This is also called net profit.
5. Fixed expenses: those expenses that do not change a month to month, regardless of how much product or service you sell. For example; rents, officers salaries, insurance, or anything that has an unchangeable, fixed cost.
6. Variable expenses: these are expenses that change according to the amount of product or services that are sold. For example, the costs of the product (it cost you four dollars to produce each CD that you sell), sales tax, wages (hiring someone because you are selling more CDs), marketing, etc. These expenses are also called marginal expenses.
7. Those areas of your business that are most profitable: each of your products and services will produce income and have expenses associated with it. You need to be able to identify the income and expenses that are associated with each product and service so that you can determine what products and services are most profitable.
8. Net profit from your workforce: the amount of profit produced by workers. Certain workers will produce products or provide services that will bring in revenue. Subtracting the cost of having those workers will result in your net profit from your workforce. It is obvious that if you are not making a net profit from certain people, you need to carefully assess your reasons for keeping them in their present position.
9. Opportunity cost: this is the time and money it takes to make and deliver a product or service. This time could be spent elsewhere if you are not making or delivering that particular product or service. You want to be delivering the most profitable item or service in order to make most profitable use of your resources. This is not actually a number, but is something you need to recognize when analyzing the financial condition of your business.
These are the basic numbers any business owner like you must know to effectively make decisions about your business. One of our jobs as a coach and your accountant is to ascertain what pieces of the financial puzzle you already know and what areas you need to obtain more complete information.
THE LIGHTER SIDE
“I’ll tell you what I tell every taxpayer who sits in that chair,” said the IRS agent at the beginning of Brown’s audit. “It’s a privilege to live in this great country, and you should pay your taxes with a smile.”
“Thank goodness,” said a visibly relieved Brown. “I thought you were going to ask for money.”
Wishing you a prosperous and balanced life