There is an excellent chance that even if you’re an expert in your particular industry, you’re probably not an expert in small business finances. This may not seem like that big of an issue on the surface. However, in order to make the best decisions possible for your company, you need to have complete and accurate information to work from. It’s easy to see how failing to grasp the financial side of the equation can quickly cause problems everywhere else.
For example, just because your company looks profitable on the surface doesn’t necessarily mean that this is the case. In fact, there are a number of clear ways in which your SMB might not be as profitable as it could be that are certainly worth exploring.
Not Everything Is About Sales
Maybe the most important thing for you to understand is that just because sales are high does NOT mean that your company is experiencing profitable growth in the way you think it is. This is actually just one small part of a much larger (and more complicated) story.
Sales could be going up AND profits could be going down in a number of ways. Maybe you’re selling a higher volume of low-margin items while also not selling as many high-margin goods. Perhaps the cost to actually make your product has increased higher (and faster) than your revenue. It’s possible that your operating expenses are so high that even though you’re increasing sales, your business is still not as profitable as it could be.
The lesson here is that you need to look beyond sales growth to find out what is really happening with your company. If you do discover a problem like those outlined above, come up with a specific solution designed to address those particular issues in the most effective way possible.
Dive Deep Into Your Line-Item Profits
Likewise, you need to recognize the difference between bottom-line profits and line-item profits—particularly in terms of the health of your business year-over-year. Instead of just looking at the bottom line, look at the tangible contribution that each product or service makes to that bottom line.
Break down all of your sales by product lines, individual products and services. Is Product A losing so much money that it is eating into the profits generated by the hugely successful Product B? If that’s the case, Product B probably isn’t as “successful” as you thought it was.
Don’t Forget About Margins
Finally, paying attention to your profit margin percentages can tell you a number of critical things about the financial health of your company, essentially all at the same time. You’ll be able to determine whether:
- You’re correctly pricing and promoting your products in a way that drives profitable growth.
- All of the products and services you’re offering are profitable to begin with.
- The true value of the relationships you’re forging with your customers, and how long they last on average.
- If you’re allocating resources in the most efficient way possible, thus maximizing profitability whenever possible.
Again, figuring out whether or not your small business is as profitable as it can be involves a lot more than just looking at any one particular line item on a balance sheet. Often, it is a combination of many things, each representing their own individual piece of the puzzle that is your company. Only by understanding the bigger picture will you have the information you need to see where you truly stand… and what you need to do about it moving forward.
In the end, the most important thing for you to understand is that while you may be an expert in running your small business, you’re probably not (nor are you expected to be) an expert in small business finances. Those are two entirely separate concepts and should always be treated as such.
Partnering with the right financial professional isn’t something that you do after your organization is already up and running. It should be a natural part of the process of launching a business in the first place. There are so many decisions that will ultimately affect your cash flow and taxes moving forward, from the financial structure that you set up to the entity you choose during formation. One wrong move at any of these points can artificially limit your ability to make money, and that is a difficult position for any entrepreneur to be in.
Instead, partner with a seasoned financial professional immediately and look to this person for insight and guidance as often as possible. If nothing else, they will make sure that the foundation upon which your company is built is as strong as possible—thus eliminating many and even all of the potential issues that could hold you back in the future.
Author: Chuck Woodson, Leading Expert and Fiduciary Coach to families dealing with trusts and estates. Contact me to handle all trust and estate matters seamlessly for you.