Why do some business owner-managers hit the profit target more often than others do? They do it because they keep their operation pointed in that direction. They never lose sight of the goal – to finish the year with a profit. You must control the activities of your company rather than being controlled by them and manage your profit orientation..
A beginner rarely shoots a hole in one, hits a bull’s-eye, or hooks a prize-winning trout. Topnotch performance in golf, shooting, and fishing requires knowledge, practice, and perseverance.
Similarly, in small businesses, year-end profit comes to the owner-manager who strives for topnotch performance. You achieve it by knowing your operation, by practicing the art of making timely, balanced judgments and by controlling the company’s activities.
Know Your Business
The time-honored truth “Knowledge is power” is especially pertinent to the owner-manager of a small business. To keep your company pointed toward profit you must keep yourself well informed about it. You must know how the company is doing before you can improve its operation. You must know its weak points before you can correct them. Some of the knowledge you need you pick up from day-to-day personal observation, but records should be your principal source of information about profits, costs, and sales.
Know Your Profit.
The profit and loss statement (or income statement) prepared regularly each month by your management consultant is one of the most vital indicators of your business’s worth and health. You should make sure that this statement contains all the facts you need for evaluating your profit. This statement must pinpoint each revenue and cost area. For example, it should show the profit and loss for each of your products and product lines as well as the profit and loss for your entire operation.
It is a good idea to have your profit and loss statement prepared so that it shows each item for the current period, for the same period last year, and for the current year-to-date. For example, a P&L statement for the month of November would show income and expenses for the current month, for November last year, and totals for the eleven months of the current year. Many corporations publish their annual reports with several previous years so stockholders can compare earnings.
Comparison is the key to using your P&L statement. If your accountant is not already furnishing figures that you can compare, you should discuss the possibility of having them provided.
Financial ratios from your balance sheet also help you to know if your profit is what it should be. For example, the ratio of net worth (return on investment ratio) shows what the business earned on the equity capital invested.