Learn to read your business books like a pro!
Recently, a QWEEN came to our consulting team to seek advice for her home based beauty business. As part of our initial analysis we asked for her financial statements for last three years.
She gave us a huge ring binder containing her monthly receipts,yearly balance sheets and cash flow projections. There were pages marked “ Profit & Loss statements” and the crisp, untouched feeling of pages revealed that this QWEEN never used her financial statements to run her business.
The whole folder was nothing but a statutory requirement to her!She was not the only one. We often find businesswomen reaching out to us for advise on how to help their business grow and they clearly show lack of understanding their own books of accounts. Most women follow what their husbands, or their husband’s or family’s accountants ask them to do.
For all those sailing in the same boat, here we have 6 quick tips on what exactly to read when you get your own binder next time.
Revenue- Costs= Income
Gross Income- Costs= Net Income
If math was never your favorite subject , and these formulas intimidate you, remember that the money you get to keep is actually money that comes in minus the money that goes out.
Revenue- as explained above is sales (money that has come in)
Cost of goods sold- It is the essentially the expenses that you incurred on the product. For example, for a beautician they will be the cost of beauty products that she purchased from the market, for a baker they will be food items and cooking products etc..
Gross Profit- Basically it means the part of income (money that came in) after you deducted cost incurred in buying the goods needed to sell the product. In the case of beautician, for example, her net income would be the money she got for a service minus the cost of the products that she used.
Selling, general and administrative expenses- These are the costs that you do not directly incur on creating a product but they are essential to run the business- like setting a shop, electricity, phone, business promotion etc come in this category. Bear in mind that they are mostly fixed expenses, which you have to bear, irrespective of whether you are selling the products or not.
Profit- Finally we come to profit or net profit or net income, which is after deducted all types of costs from total sales/revenue.
Learning the basics of finance is all the more important owing to easy funding available through banks and non-banking finance companies. So make sure that you get your basics right.
with inputs from:
Pic courtesy- hdfclife