Know your numbers

I spend considerable time counseling small business owners and entrepreneurs in Springfield, all of whom cherish a dream of business success.

However, the bar for success in a new business is high.

According to the United States Census Bureau, more thanĀ half of all new businesses fail within the first five years. Experts agree that a leading cause of such failure is that business owners often do not understand their financial statements, and consequently, fail to manage their cash flow.

Rayanna Anderson

Rayanna Anderson

How can you avoid becoming one of the statistics?

Making it in today’s business world requires more than looking at the bottom line on income statements. It involves understanding and interpreting what the income statement, balance sheet and some key financial ratios really mean. It involves using that information to make informed business decisions.

The first step is to acquire a good knowledge of what the reports are really telling you. The income statement, also called a P&L, profit and loss statement, or an income and expense report, is your best starting point. It is a summary of revenue and expenses that have occurred over a period of time, and is required for tax purposes. Information from the income statement can be used to make better-informed decisions about your company’s pricing, margin maintenance and expense control.

But how do you know if your numbers are good or bad? Compare dollar amounts from year to year, or from month to month. Many companies have seasonal sales cycles and the relevant comparison is how you did over that period of time compared with the same period in prior years. For example, if you sell Christmas candles, you would want to compare your sales after Thanksgiving through the end of the year to that period of time every year, with the goal of being more profitable every year. Additionally, you would want to compare your results with others in the same industry. Your best resource for that is a trade association for your business. When that is not available, other resources are available at most libraries or the Missouri State University Small Business and Technology Development Center.

Get the rest of this article via the Springfield News-Leader’s website.
Excerpt used with permission.

– Contributed by Rayanna Anderson, entrepreneurship coordinator and community liaison for MSU’s College of Business and former director of the MSU SBTDC. Anderson writes about issues she regularly sees consulting with small businesses in Springfield and in the state of Missouri.