Increase Your Company’s Profits: Know Your Numbers

 

Last week I introduced the 6 Strategic Steps to Increasing Your Company’s Profits & Improving Cash Flow.

Over the next six weeks, I’ll be taking a deeper dive into each one.  So let’s get started!

Step #1:  Know your numbers

To know your numbers is to be in relationship with your numbers.  It’s about listening to the story that your numbers are telling you.  It’s about seeing the patterns and trends.

Knowing your numbers increases your company’s profits because it gives you actionable information.  Without knowing your numbers you are shooting in the dark, you don’t know where you are, much less if you are making progress to getting to where you want to go.

Knowing you numbers will show you “what is.”  And while there are some things you cannot control, there are a ton of things you can.  Looking at your numbers on a monthly basis will show you problems, opportunities, successes, hidden costs, trends, and patterns.

Your job as CEO of your company is to make decisions, to have vision, and to communicate that vision through decisions.  It is your job to delegate the implementation and execution of those vision/decisions to others.

Speaking specifically about the internal financial operations of your business, these others include your bookkeeper, your CFO, and your tax accountant. You’ve got more people on your financial bus, but they are out of the scope of this conversation.

So that means that in order for you, as CEO, to make the best decisions , your bookkeeper needs to be giving you at least three financial reports (more on that below) on at least a monthly basis that  show you were you are now and how the company has been doing so far this fiscal year.

Then you sit down with your CFO and do two things:

1. Go over the reports to get a good “rear view mirror” picture so that you get some actionable information and spot trends, changes, patterns, problem areas, and opportunity openings.
2. Use that information to look forward and make decisions on what to tweak.

Now “tweak” covers a lot of ground, from reallocating budget monies to changing your business model.  The good news is that in doing this review monthly you catch things sooner rather than later.  You make more minor changes and fewer pivots.  You aren’t in reaction mode all the time, putting out fires.  You are running your business.  It’s not in running you.  And this calm, this peace of mind allows your creative brain to do its thing.  Your brain can focus on new revenue generating ideas, on client retention, on business development.  And that’s how staying in relationship with your numbers increases your profits.

Here are the essential monthly reports to review:

• profit and loss statement, budget vs. actuals
• balance sheet
• cash flow projections

And if any of these apply to your business, pull them, too:

• accounts receivable aging
• accounts payable aging
• statement of cash flow
• inventory
• sales by item
• profitability by job
• profitability by customer.

It bears mentioning again that these monthly reports have to be current, accurate, and complete in order to be useful to you, the CEO.  If your bookkeeper isn’t getting you these reports in that condition (or your don’t have a bookkeeper) that’s the first thing a CFO will help you with.  Hiring, vetting, and working with a bookkeeper can be a tricky thing.  You may not have the expertise to know what to ask for or to recognize warning signs.  A CFO fills in the gaps of your financial knowledge.

Now for the patterns and trends, problem areas and opportunity openings.  What exactly are you “reviewing” when you’re looking at your financial reports?,

For your P&L:

Are your sales this month, this quarter, year to date (YTD) up or down as compared to previous month’s this fiscal year and as compared to all of last year?  What are the reasons for that?  The answer to this question is the fun part.  This is the actionable information I was talking about before.

Then you look at the following areas and ask the same questions:

• cost of sales
• gross profit
• marketing
• overhead
• net profit

With this information you make decisions so as to mitigate the problems and repeat the successes.   You delegate those decisions to your bookkeeper and CFO, then you check back the following month and see how you did.  Rinse and repeat.  And thereby increase your profits.

For your balance sheet:

If any of the following are less than optimal, then those are the areas that you strategize and brainstorm possible solutions with your CFO.

• cash position is adequate
• inventory turnover is healthy
• accounts payable is current
• accounts receivable is current
• all liability obligations are met

For your cash flow projection:

What is your cash position going to be next month? next quarter? six months for now?  If any red ink shows up on the cash flow, ask yourself

how you can turn that around.

• Can you work with your customers to get money in sooner?
• Can you work with your vendors to create an extended payment plan?
• Is the negative cash the result of either
  • lack of overall profitability because your business model is flawed and needs to be changed? or
  • lack of actual profits because you don’t have enough sales?
• Would you benefit from a line of credit from a bank?
• Would bringing on outside investors be a better fit for you?
• Is your compensation structure sound?

So that’s it in a nutshell.

And just so you know, I only work with five clients at any one time.  This insures high quality and attention to detail.  I’m close to capacity, so if CFO services is something you’d like to explore, please give me a shout and let’s have a conversation to see if we’re a fit.

And if some of the accounting lingo I’ve used is unfamiliar to you, stay tuned to next week’s post about knowing some basic accounting lingo.  I’ll be breaking that down for you then.  Truth be told, I had a hard time deciding which step to put first, ‘cause you can’t really understand your financial reports without knowing some concepts and terminology.  But I like learning and teaching “in context,” so that’s why the numbers came before the terms.  Again, truth be told, you’re going to be learning and deepening your knowledge and understanding always.  There is no arrival.

Till next week!

To your financial success,

​​​​​​​Monique