Understanding Financials WorkshopJun 21, 2023
The Jamestown Regional Entrepreneur Center (JREC) hosts regular entrepreneurship events to gather, network and support business owners and those interested in starting and building a business. Ciara recently hosted this workshop on understanding financials and profit. Here's a closer look at what she covered.
If you'd like to participate in future workshops (they're all FREE!), take a look at JREC's full training schedule.
For most of us, the numbers of our inventory based business are the hardest part of the job. Oftentimes, we get into business because we love what we do. The numbers though, are a very real and important part of how we stay in business and grow the business. Let's break down financials and learn what they're saying about your business. I want to give you the confidence to create a profitable business.
There were many years at the beginning of my entrepreneurial journey when I didn't feel any confidence when it came to the numbers. I felt like a fraud. But once I started to understand the numbers behind my business, I felt completely empowered. I love sharing this knowledge and empowerment with other entrepreneurs.
I know we're talking about financials, but what I really want to help you understand is profit. At the end of the day, the reason we want to know what our numbers are saying about our business is that we want to understand profitability. We want to know where the money in our business is going and why we can or cannot keep the money in our business. Once we understand our financials, we can really start to understand and grow our profit.
I know your dirty little secret. It's that you're doing a great job. You've got a great business concept, you're growing, scaling, working a lot and doing all the things - but you're always stressed out, overworked, and you're constantly out of money. And you don't know what to do with this secret. From the outside, you look wildly successful but the reality is that you're completely overwhelmed. You don't know how to make sense of it all.
If you're constantly asking yourself, "Where is all of my money going?", then I want you to think of the numbers of your business like a puzzle. Each number on your financials is a piece of the puzzle. The most important piece: profit. At the end of the day, profit is what's left, it's what writes your paycheck, and it's what you use to pay off any debt you're carrying.
When we're doing a puzzle, we often start by turning over each piece of the puzzle so we can see what we're really working with. In doing this, we understand what's in front of us. I want you to do this in your business. Look at the size and type of the pieces. Think about what success looks like in your business. This picture or vision is the end result of what you get when you put together all the pieces. From there, we move on to the border. Let's build out the frame of your business puzzle.
In your financial set, there are two big pieces: profit and loss and the balance sheet (the third piece is the cash flow statement, but we won't cover that in this workshop).
The Profit and Loss Statement
A profit and loss statement gives you a snapshot of what's already happened in your business. It doesn't show us what's going on in our business today or in the future - it's only a look into the past. It has five different components:
- Sales: this section includes any sales you've made - product, services, projects, etc. Any money that's come in in exchange for goods or services should be listed here.
- Cost of Goods Sold: this isn't the inventory purchased; it's the cost of what's actually sold. This includes the cost of materials and labor (for makers), subcontractors (for coaches and service providers), freight in (for inventory based businesses), and whatever else it took to produce the sales you've made.
- Gross Profit: the difference between the sales and the cost of those sales (item one minus item two).
- Expenses: this includes fixed and non-fixed expenses (things like rent, travel, payroll, meals and entertainment, utilities, marketing). DO NOT include debt payments or inventory purchases in this section.
- Net Income: we get this number by subtracting expenses from the gross profit (item three minus item four). Our net income shows our business' overall profit or loss. This number is so much more important than the number at the top of our profit and loss statement (net income > sales). Who cares how high sales are if you're not showing a profit at the end of the day?
I want you to focus on showing a PROFIT at the bottom of your profit and loss statement.
The Balance Sheet
A balance sheet shows a snapshot in time and tells you about the overall health of your business. You pull these numbers as of any given day. There are two sections: assets and liabilities. These always balance each other out.
Assets are anything that has cash value or can be turned into cash. They include things like checking and savings accounts, furniture, fixtures, machines, websites, trademarks, and inventory because all of these things could be sold and turned into cash. We want the assets part of our business to be really rich and full.
Once inventory sells, it moves from the balance sheet to the cost of goods sold section on the profit and loss statement.
Liabilities are anything you owe to someone else. They include things like terms (outstanding accounts payable), credit card debt, and business loans. We want the liability section of our balance sheet to be much smaller than the assets section. This is very important if you're looking to get financing or to bring in a business partner.
We grow the asset side of our business by increasing profit. The more profit we have, the more cash we get to keep, the more debt we pay down, the more we can decrease liabilities and increase assets.
At the bottom of our balance sheet there are additional sections that ensure everything balances out. These sections include: opening balance equity (what you put into business when started); retained earnings (the net profit over time minus any distributions); owner's investment; net income All these numbers ensure everything balances out.
This is important: when it comes to debt payments, principal payments show up on the cash flow statement as cash going out of your business, but they are not an expense.
So where does profit come from?
Profit comes from the difference between sales and cost of goods sold. We first focus on our gross profit, and then we have to live lean and mean on our expenses. If you're finding yourself at a place where your profit and loss statement is showing a loss, there are three things you can do to increase profitability:
- Look at your gross profit/gross margin and work to improve it. What are you charging for your services or products compared to what they cost you? Shift this number so that you see an increase in your gross margin.
- Look at your net income as it relates to expenses. Where can you cut expenses? Do an audit of your expenses, and figure out where to make changes.
- Look at overall sales. What entrepreneurs love to do is find more customers. But, we have to understand what's happening after we find the customers and make the sales. Be sure to take a look at the first two steps before you work on making more sales.
Here are you next steps:
First: record your sales accurately. Maybe you use a point of sale system, maybe it's a ledger. However you record your sales, be sure they're accurate and show what's really coming in for revenue and what your cost of goods sold are.
Second: record your costs accurately. You have to be honest with yourself about what you're actually spending. Write down every single dollar that leaves your business. This will put you in a place where you can do an audit of your expenses and figure out where to make changes.
Third: record your assets accurately. Take account of inventory and look at the value of all of your assets.
Fourth: record your debt accurately. Put it all in front of you so you can see it in one place. Who do you owe? When is it due? What are the interest rates? What's the complete picture of your debts? Oftentimes we avoid looking at these numbers, but whether we look or don't look, the numbers are the same. When we look at and know the numbers, we can create a plan and put that plan into action.
Fifth: set goals and a budget. The hustle, stress mindset comes when we chase sales that we think will fix problems. Once we understand our financials, we can create realistic goals and a budget that makes sense for our business.
How should you use a bookkeeper?
You don't necessarily need a bookkeeper when it comes to your business finances. You just need to be comfortable and confident enough to do the work and to track everything. If financials aren't your strength, I recommend hiring them out. Regardless of what you decide, what's true is that you do need a set of accurate financials. Do not run your business out of a box.
Why should you have a Profit Strategist?
A bookkeeper will compile all your financial data for you, but those numbers will only show you what has happened in your business in the past. A bookkeeper's job is not to look to the future. This is where a profit strategist steps in.
A profit strategist looks at all of your numbers and creates a realistic strategy about where you can go with your business and how you can get there. They help you determine what you can do to create and keep more profit in your business.
Who is in charge of your financials?
You are! Stop playing store with your store. You are in charge of your business. There are so many tools and resources available. You can make decisions that will help you grow a profitable business. I want you to feel confident and empowered to be the best business owner you can be.
How do you use your financials to grow profit?
Using your financials as a tool is so important. It should become part of your weekly, and daily, routine. Have a Money Monday Mindset. Every Monday morning, look at your numbers first thing. What happened last week? What were my sales goals and how did I actually do related to those goals? How much did my sales cost? What money did I get to keep? What's my financial plan for this week?
Interesting in working with me?
After this workshop, I hope you're ready to get going with understanding your own financials. I'm inviting you to get started with the Quickstart to Inventory Genius. The Quickstart is my keystone coaching roadmap. You'll dive into three modules that will quickly layout five things to focus on in your inventory based business. You can implement these five strategies right away in order to drive immediate profit. And with the Quickstart, I GUARANTEE that you'll double your investment through either making, saving, or finding that amount in PROFIT. The Quickstart really is the perfect way to get your inventory based business on the right track.
If the Quickstart feels like too big a leap, I hope you'll grab a copy of my book, Inventory Genius. It's a quick read that gives you bite-sized, actionable steps you can put into place in your business, right away. It's available in three different formats so you can easily read or listen.
And here's a reminder: If you'd like to participate in future workshops like these (they're all FREE!), take a look at JREC's full training schedule.