Maximizing Profits in Small Towns: The Essential Guide to Financial Reporting for Business Owners
The Key to Small-Town Business Success: Understanding and Utilizing Financial Reports
The basic rules of baseball haven't changed much in nearly 100 years.
It's still 60'6" to the pitcher's mound. The bases are still 90' apart. Three strikes, you're out. Four balls, you walk.
What has changed is how the game is coached and managed.
Before computers, when someone came to bat with men on base, the manager crossed his fingers and hoped the pitcher could get him out.
Today, the manager knows the batter's batting average and his average with two outs and runners in scoring position.
He knows how the player bats against right-handed and left-handed pitching. And a host of other stats about every player on the opposition as well as his own team.
The same is true in business.
Your financial reports provide information about your business that you should use when making financial decisions.
However, the sad fact is most business owners only look at a financial statement twice a year.
They look at the annual Profit and Loss Statement (P&L) (did we make any money?) and their taxes (how much of our hard-earned cash do we have to pay?).
Let me show you how different parts of your financial statements can affect your business.
First, What Kinds Of Information Are We Looking For?
We will examine the numbers, ratios, and percentages and how each affects your bottom line.
To know if your numbers, ratios, and percentages are favorable or unfavorable, you need something to compare them to.
Most associations will have these "base" numbers for your industry and the formulas to calculate them.
Your numbers may vary from the average because of your location, population, or company size.
As an example of how to find some basic numbers, I asked 'Perplexity.ai" the following question:
How much profit should a 10,000 sq ft hardware store in a city of 50,000 make annually?
Here's the answer:
"The profit a 10,000 sq ft hardware store in a city of 50,000 should make annually can vary based on several factors such as location, expenses, and revenue. According to the startup costs for a hardware store, the average annual expenses can range from $390,000 to $580,000, including rent, inventory, equipment, technology upgrades, marketing costs, staff salaries, insurance, and renovation costs.
However, retail businesses' annual revenue per square foot can also vary significantly. While no specific data is available for the profit of a hardware store of this size in a city of 50,000, it's essential to consider the local market demand, competition, and the store's unique value proposition to estimate potential annual profit.
Examining the financial performance of similar-sized hardware stores in comparable locations can provide valuable insights into expected annual profits."
There are associations for almost every type of business you can name.
Some of these associations include:
US Small Business Administration (SBA): The SBA offers low-cost business loans, classes, and networking opportunities for small business owners.
Business Network International (BNI): BNI provides opportunities to grow referrals through its extensive network.
National Federation of Independent Business (NFIB): This association is an influential small business advocacy group
SCORE: SCORE is a nonprofit association that provides in-person or online business mentoring for entrepreneurs.
Entrepreneurs’ Organization (EO): EO is a global network exclusively made up of entrepreneurs, offering mentorship and support for entrepreneurial success.
The Small Business Administration also provides a resource directory with information on national organizations and programs that can assist small businesses.
The SBA also offers a Franchise Directory, which is made available for use by lenders/CDCs in evaluating the eligibility of a small business that operates as a franchise.
Cost Of Goods Sold (Cost of Sales/Cost Per Customer)
The cost of goods is producing, converting, or buying an item that is sold.
The formula is straightforward:
Take total sales of all products and subtract the cost of goods and "all" overhead; the difference is your gross profit margin.
This formula should be done overall and again for each product.
The individual process will show which products are "winners," and increased inventory might be considered.
Or which are "losers" and should be eliminated from your stock.
Return On Sales (How Much Do You Make On Each Sale)
Another gauge of your business is how much it costs for a customer to buy a widget from your business.
How much does each sale cost, and how much do you make?
You'll need your Profit and Loss Statement (P&L) for this one.
Return on sales will show you the percentage you make on each dollar of sales.
The formula:
Divide "net" pretax dollar profits by total sales.
The beauty of this formula is it measures (in percentage) how efficiently you convert a sales dollar into profit.
Cost-Benefit Analysis: Should You Or Shouldn't You?
Ever get an idea and wonder if it will work?
The cost-benefit analysis will help make that decision.
Suppose you have an auto parts store and want to expand to other cities.
If the cost of expansion outweighs the income produced by each store, then the move is not a good idea.
Have you ever had a re-call on a household appliance or automobile?
Companies must weigh the cost of the re-call vs. the cost of customer goodwill, lawsuits, and customer confidence.
The re-call may cost the company more, in the long run, if they don't do it than if they do.
Could You Make More Someplace Else?
How much have you invested in your company?
How much are you taking out of the business?
Salaries, bonuses, and benefits can significantly impact any business.
Start by dividing pretax profits (P&L) by Equity/Net Worth (Balance Sheet).
This formula will show you your return on your investment.
If it's less than 5%, you might be able to make close to that in a good money market or bond investment. If you like what you are doing — keep doing it. If not, stop working and start living.
How Often Do You Turn Over Your Inventory?
If you're a retailer or wholesaler, you must move inventory.
How much inventory tells the health of your business and how well you're managing that inventory.
To calculate, divide your "average inventory" into the Cost of Goods Sold (P&L).
The higher the number, the more turns you have, and the healthier your business.
Dealing With Accounts Receivable
If you're in business, you must be paid on time for your goods and services.
Slow pay can put you out of business.
You must have a "handle" on how quickly the money is received.
The first step is to compute your average sales day.
You can take your total sales for the year and divide by 365 "IF" you're open all year.
If not, compute the number of days you are open for business.
Next, divide that number into your current accounts receivable.
This formula will show you the average number of days you collect from your accounts receivables.
Less than thirty days is preferred.
Thirty to 45 days is acceptable; almost anything over 45 days may cause a hardship on your business.
Learn To Do It Yourself
Accounting is a lot like practicing medicine.
The patient comes in, and the doctor puts on a heart monitor and takes blood and other fluids for testing.
Then, the doctor reads and evaluates the tests and arrives at a diagnosis.
The patient is either in trouble or the patient is healthy.
No, I don't want you to do your business accounting.
Most businesses need a competent accountant to avoid trouble with the IRS.
You should learn to read your financial statements to know what's happening in your business.
Otherwise, you'll start making decisions, creating problems where your accountant must try to bail you out.
They may not always be successful.
Some Final Thoughts
Successful business owners schedule a monthly schedule to examine their business financials.
Many industries have computer systems specific to that industry that can quickly produce the kinds of reports mentioned above.
Cash is the lifeblood of every business. Efficient management can distinguish between success and purchasing a "Going Out of Business" sign.
I hope you enjoyed reading this and that some of the links provided helped you better grasp your financial condition.
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