Is Your Business Making Money?

by Fern Gordon

Published on this site: September 22nd, 2005 - See more articles from this month

Is your business making money? Would you know?

It sounds like a painfully obvious question but figuring out whether your business is actually making money is no easy task.

Most small business owners have a pretty good idea of what their top line is (their revenues), but unless they're closely tracking and inputting all of their expenses, the bottom line can often come as a complete surprise.

For example, a client of ours recently started a landscaping service. Although his sales were rapidly increasing, he was frustrated by the fact that it didn't seem to have much of a positive impact on his bottom line.

He thought that by charging his clients $20 per hour and paying his workers $10 per hour, the extra $10 would be his to keep. He forgot about all of the costs involved in actually carrying out the job starting with payroll taxes on the $10 wages, transportation costs, office overhead and advertising. At his current rates, no matter how much business increased, he would never make any money.

By inputting all of his costs into the proper format, it became immediately apparent he wasn't charging enough for his services. The answer was to raise prices or get out of the business. Fortunately, he was able to raise prices without upsetting clients. Now he can comfortably carry on his business and keep adding to his bottom line.

Track Key Numbers

Every business has key numbers that directly affect its bottom line. These numbers can vary from industry to industry, company to company, and even between departments.

For example, food costs are important to a restaurant while our landscaper client needs to track such costs as owning and operating garden machinery. A company that has both a software development division and a consulting division has different expenses and revenue streams for each, and needs to break them out so they can be monitored individually.

Make sure you know which figures are critical to the success of your business. Then make sure you customize your financial statements so you can follow those figures closely. They provide crucial information about your business peformance and can give you early warning signs of problems that might otherwise sink you.

There are three key financial statements to review:

• Income Statement: Shows all revenues and expenses during a given time period. Also called a Profit & Loss (P&L) statement.
  
  
• Balance Sheet: Shows all assets and liabilities of the business.
  
  
• Cashflow Statement: Shows the actual money that flows into your business and how it flows out during a given time period.

Review Your Financial Statements

Most businesses should review their financial statements on a quarterly basis as a bare minimum. Monthly reviews are better and some businesses can benefit from weekly or even daily reviews. The frequency that's right will depend on the size of your business and your volume of transactions.

If you're not sure how to read or interpret financial statements, ask your bookkeeper or accountant for help, or pick up a book such as Finance and Accounting for Nonfinancial Managers.

Still not convinced it's important to bother with all that financial "mumbo jumbo"?

Here's another example: A restaurant owner had two locations but only one set of books. Although he had the feeling that one of the locations was not doing very well, it was only by formally splitting the two that he discovered the true magnitude of the problem.

One location was making all the money while the other was losing it in buckets! The owner decided to close the money-losing operation and give his full attention to the profitable location.

Creating and using financial statements on a regular basis will clearly tell you if your business is making—or losing—money and will also show you what needs to be changed to address any problems.

Fern Gordon is co-founder of The Profit Line <http://www.theprofitline.com>, a bookkeeping service for small to medium-sized Canadian businesses. She has a background in investment banking, and started and operated a successful chain of restaurants for more than eight years. Fern can be reached at (416) 861-8177 or [email protected]