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How do you know if your business is profitable? Just making sales, sales, sales is not enough to have a profitable business. Focusing on making high sales volumes is GOOD BUT NOT ENOUGH if you want to have a profitable business. And whenever your business will be assessed by a banker, a venture capital company or a business angel, the first question they will ask is whether your business is profitable. And often times, even though you are giving your soul at making your business work and put tremendous efforts into it, you are in fact just wind blowing and yet you don't even know if you are heading in the right direction or not. Does your business really make money?
Well I am going reveal a proven 3 steps process that will help you to understand how to read an income statement. I guarantee that after this, you will be able to know and understand how to look at your business from a financial perspective and tell whether you are on the right track. So in order to find out whether your business is heading in the right direction and if not only you are currently making money in your business but also if you will make even more money in your business.
Step 1: Take your income statement and look at the first line. That's right, you are looking at the sales figures or turnover. These are the raw figures if you like. This figure tells you how many of the products you sold and if you are doing well in your business from a sales perspective. You might have a good sales team, you could have had a successful launch of a new product, you might have raised your prices, you have gained more customers. How sales figures are calculated is pretty simple:
Sales = Number of Products sold x Price Of The Product
Well, that means therefore that this line will depend how well you manage to sell your products or services (meaning are you good at converting your prospects or do you have repeated customers) AND/OR how well priced your product is (meaning you managed to find the right pricing for the product or the service you are offering).
Now calculate the sales growth year by year. How much in terms of % did your sales growth: did it growth by 5%, 10%, 120%? Calculate what the growth has been at least in the last 3 years.
Step 2: Assess how strong the growth is.
Is it one digit growth: from +1% to +9%?. Then you can say it is AVERAGE
Let's say your sales figure has grown by 1% every year. Well this is okay but not fantastic and not very impressive. Well it's better than having sales going down of course but again, in terms of qualifying the growth, this would mean your business is stagnating.
Is it double digit growth: from 10% to 90%? Then you can say it is STRONG
Once your business has reached that point, then you can be proud of yourself. This is when it starts to become serious and your challenge is going to be how to maintain it.
Is it triple digit growth: from 100% upwards? Then you can say it is EXPONENTIAL
When you have that type of growth it generally means one thing: your business is either in an exceptional growth phase, it will be most of the times at the early beginning when you are building your customer base and you're making it happen.
Here is an example:
Sales Year 1: 100K
Sales Year 2: 120K
Sales Year 3: 200K
So to calculate the growth between Year 1 and Year 2, you will do (Year 2 -Year 1) / Year 1 = (120-100)/100 = 0.2=20% growth => STRONG GROWTH
Between Year 2 and Year 3, you will do (Year 3 -Year 2) / Year 2 = (200-120)/120 = 0.667=66.7% growth => STRONG GROWTH
This company has been in a tremendous growth in the last 3 years. Does it make sense? This is valid for a business of any size whether you want to understand a small business income statement or a large business income statement.
Step 3: Look for a trend
Look at the growth rate in the last 3 years and look for a trend. If the trend goes up, you have a positive trend. If the trend goes down, you have a negative trend.
In our last example, we had Year 2: +20% and Year 3: +66.7%. That's right. This is a very strong growth.
TAKE ACTION NOW!
Now it's your turn. Get hold of your large or small business income statement and calculate the growth as we did in Step 2 and look for the trend as explained in Step 3. Got it?
Perfect, you have reached the first milestone which has shown you how to read an income statement and now you know and you can demonstrate to anyone whether your business is thriving and to which extent.
How do you know if your business is profitable? Just making sales, sales, sales is not enough to have a profitable business. Focusing on making high sales volumes is GOOD BUT NOT ENOUGH if you want to have a profitable business. And whenever your business will be assessed by a banker, a venture capital company or a business angel, the first question they will ask is whether your business is profitable. And often times, even though you are giving your soul at making your business work and put tremendous efforts into it, you are in fact just wind blowing and yet you don't even know if you are heading in the right direction or not. Does your business really make money?
Well I am going reveal a proven 3 steps process that will help you to understand how to read an income statement. I guarantee that after this, you will be able to know and understand how to look at your business from a financial perspective and tell whether you are on the right track. So in order to find out whether your business is heading in the right direction and if not only you are currently making money in your business but also if you will make even more money in your business.
Step 1: Take your income statement and look at the first line. That's right, you are looking at the sales figures or turnover. These are the raw figures if you like. This figure tells you how many of the products you sold and if you are doing well in your business from a sales perspective. You might have a good sales team, you could have had a successful launch of a new product, you might have raised your prices, you have gained more customers. How sales figures are calculated is pretty simple:
Sales = Number of Products sold x Price Of The Product
Well, that means therefore that this line will depend how well you manage to sell your products or services (meaning are you good at converting your prospects or do you have repeated customers) AND/OR how well priced your product is (meaning you managed to find the right pricing for the product or the service you are offering).
Now calculate the sales growth year by year. How much in terms of % did your sales growth: did it growth by 5%, 10%, 120%? Calculate what the growth has been at least in the last 3 years.
Step 2: Assess how strong the growth is.
Is it one digit growth: from +1% to +9%?. Then you can say it is AVERAGE
Let's say your sales figure has grown by 1% every year. Well this is okay but not fantastic and not very impressive. Well it's better than having sales going down of course but again, in terms of qualifying the growth, this would mean your business is stagnating.
Is it double digit growth: from 10% to 90%? Then you can say it is STRONG
Once your business has reached that point, then you can be proud of yourself. This is when it starts to become serious and your challenge is going to be how to maintain it.
Is it triple digit growth: from 100% upwards? Then you can say it is EXPONENTIAL
When you have that type of growth it generally means one thing: your business is either in an exceptional growth phase, it will be most of the times at the early beginning when you are building your customer base and you're making it happen.
Here is an example:
Sales Year 1: 100K
Sales Year 2: 120K
Sales Year 3: 200K
So to calculate the growth between Year 1 and Year 2, you will do (Year 2 -Year 1) / Year 1 = (120-100)/100 = 0.2=20% growth => STRONG GROWTH
Between Year 2 and Year 3, you will do (Year 3 -Year 2) / Year 2 = (200-120)/120 = 0.667=66.7% growth => STRONG GROWTH
This company has been in a tremendous growth in the last 3 years. Does it make sense? This is valid for a business of any size whether you want to understand a small business income statement or a large business income statement.
Step 3: Look for a trend
Look at the growth rate in the last 3 years and look for a trend. If the trend goes up, you have a positive trend. If the trend goes down, you have a negative trend.
In our last example, we had Year 2: +20% and Year 3: +66.7%. That's right. This is a very strong growth.
TAKE ACTION NOW!
Now it's your turn. Get hold of your large or small business income statement and calculate the growth as we did in Step 2 and look for the trend as explained in Step 3. Got it?
Perfect, you have reached the first milestone which has shown you how to read an income statement and now you know and you can demonstrate to anyone whether your business is thriving and to which extent.
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