Whether it’s filing tax returns, seeking a loan, bringing on a new investor or partner, looking into selling the company entirely or partially, or simply reviewing how the business did for the last month / quarter / year, Financials are the most important and most common way to see the health, performance, and narrative of a business.
But they’re also worthless! Sort of.
If you’re a small business owner, you’ll need both Financial Statements — Balance Sheet and Income Statement (also known as Profit and Loss Statement or simply the P&L) — on a regular basis for the reasons given above. You can even make strategic and tactical business decisions armed with the observation and analysis derived from these Financials.
What product / service is selling well? Which one isn’t? What costs have ballooned over the past quarter? Which expenses can be cut?
However, if these are the only reports you rely upon while running a business, then I’d like to offer you a rude awakening. You need more.
Let me offer you an example. Say you run an advertising agency with 15 full-time employees. One critical metric I provide for my clients in this situation is Revenue per Employee.
It is simply Gross Revenue divided by how many full-time staff and freelancers you employ, including yourself and your partners, assuming this is everyone’s main day-time job.
For the Professional and Creative Service space, I use a ballpark range of $150,000 to $250,000 Revenue per Employee. So with 15 people, the Gross Revenue for this company for the past year should be between $2,250,000 and $3,750,000. Anything less, you’re in big trouble and you need make some hard decisions (but this shouldn’t be a big surprise for you). Anything more, you’re either doing extremely well or something is fishy. You wouldn’t know something would be fishy if you only relied on your Financials.
Another example would Gross Margin per Product Line. Let’s say you run a winery, offering a few different kinds of wine. It’s critical to assess the health of your business by studying the performance of each wine type you sell. By taking your Gross Revenue minus your Cost of Goods Sold for each Product Line, you can see in detail how each wine is performing.
There’s virtually an endless number of standard and customized reports you can used as a business owner to truly diagnose the health of your company. Simply trusting Financials alone will most certainly lead you to entrepreneurial purgatory: staying small, stagnant and dull without growth.
- Thomas Kim from Tabular LLC