Know The Numbers
As Marcus says, not understanding how to make business decisions based on the numbers is a big mistake. As a member of the Finance Team, you’re responsible for knowing the numbers and thinking of ways to improve how much money we make a month, also known as the bottom line. Below is a list of finance terms that every member of the Finance Team should be able to talk about.
Assets – The amount of money we have in the bank along with anything that can be sold to generate more money
Liabilities – any debts or financial obligations we owe
Accounts Receivable – The amount of money we are owed by customers
Accounts Payable – The amount of money we owe vendors
Net Income – Net Income, sometimes called Net Profit, is the result of subtracting all our expenses, including taxes, from our income. Net profit is a good indicator of whether we’re making or losing money. This information can be found on the Income Statement.
Sales – When we sell a product to someone, we’ve made a sale. Keeping a close eye on sales is important, as a dip could be a warning sign of trouble. In the same respect, it’s important to pay attention when sales are up. Determining why business is good at the time FH Gizmos is selling more products is easier than trying to figure it out later. Reacting quickly to an increase in sales also allows you to determine what you need to keep doing to sustain that growth. Check The Ledger to see our daily sales figures.
Cost of Goods Sold – The Cost of Goods Sold are the direct costs it takes to make a finished product. This amount includes the cost of the materials used in creating the product along with packaging, shipping, etc.
Price Point – The Finance Team must always know the Cost of Goods Sold because it helps us set the Price Point. The Price Point is how much we sell our product for. If we set the Price Point to low, we won’t make enough money to cover our expenses. If we set the Price Point to high, people may not buy our products. Setting the right Price Point is crucial to making FH Gizmos successful.
Gross Margin – Also known as your gross profit—and related to price point—Gross Margin reflects how much money remains after the actual cost of our product is subtracted from the selling price. Gross Margin is often expressed as a percentage. Gross Margins can be found on the Income Statement.
Total Inventory – We must monitor our inventory numbers on a weekly basis to ensure that the amount of inventory isn’t gradually increasing, as this could be a sign of sales trouble. By tracking inventory on a regular basis, you can spot problems early enough to avoid the negative effects of excess inventory like reduced profits and waste.
Understanding your critical financial numbers may not be as exciting as making a big sale, but keeping an eye on these must-know figures will give you precious peace of mind—and a glimpse of what the future holds for your business.