Most of us are in business to make a difference in something that matters. It may be making a difference in the health, life or happiness of another. It may be making relationships stronger, driving safer or even making the planet healthier. We do the work because it makes a difference.
At the same time, we are also in business for the money. We use the business to help support a lifestyle that matters to us. That means that we have to know our numbers – what creates them and how to use them to make wise decisions.
There are a few ways looking at the numbers can help us be better at business. The Income Statement, for example, allows you to organize the numbers to serve as a scorecard. This helps you literally visualize how your business is doing; the numbers are the financial representation of the quality of your decisions. You can use your Income Statement, when it is laid out wisely and the numbers in it are accurate, to get it to tell you a lot about your businesses – sometimes things you can’t see.
Numbers are critical to business success.
Business coaching is not just about hiring wisely or managing dysfunctional teams. A big part of what I do with my clients is to help them better understand the Income Statement to access its value and its power. As a previous financial executive, I help organizations see potential from their numbers. Here is what I share:
- Learn the structure and flow of the Income Statement and align it to your business. Your business should dictate the way you create and manage your Income Statement. It should include income and expense captions that are both meaningful to the business and able to be used to understand the business. Follow the basic format of your industry. For example:
Net Sales – Cost of Sales = Gross Profit
Gross Profit – Selling and Operating Expenses = Operating Income
Operating income – Interest and Taxes = Net Income
Using this basic layout will help you clearly identify the income and expense captions that belong in each area. Pro tip: once you set it up, keep it consistent from period to period. This will help you have Income Statements that you can compare year to year because the components in each caption are the same.
- Ensure your numbers are accurate by creating and supporting consistent operational policies and procedures. Numbers that are inaccurate or numbers that are put in one account one month and in a different account in another month make the numbers meaningless. Accuracy is critical. Create procedures to record expenses, bill customers, give credits, pay invoices and issue payroll, among the other things a business does, then train your people how to do it accurately and well. Garbage (i.e. meaningless numbers) entered into the Income Statement leads to garbage out.
- Spend time with the numbers to get them to tell you their story. Numbers aren’t just a scorecard; they are also a storyteller. Your numbers, when you use them and review them can help you assess whether you pay too much for product, labor, services, insurance and even subcontractors. Your numbers can tell you how much you have to bill to cover your expenses and what amount of sales dollars each employee brings in. The options to dig into the numbers to get them to expand what you know about how you are doing are limited only by your creativity. Get in the habit of reviewing your numbers for what they tell and don’t tell you.
By creating a process to record your income and expenses in a way that is accurate and meaningful encourages better understanding of the decisions you made that generate the results. Train all of your employees to be effective at using numbers and understanding and managing how they impact your Income Statement. They can’t improve what they don’t know, so get good at sharing the meaningful income and expense captions on the Income Statement.
By Jay Forte
Consider reading Pay or Purpose – What Really Activates Employee Performance?