Reading the Numbers

The only thing that matters in any business is knowing how to read the numbers. Financial income statements tell the story of how any business is operating in terms of cash flow.  This income statement is the lifeline for any business that is looking for long-term success.  The income statement is also what determines if a business will receive funding for operation. This funding can be in the form of a bank loan or from a group of investors. There are some important factors that can affect the outcome of a company receiving money. These factors are net sales, gross profit, total expenses, and net profit.

The net sales on an income statement are the total amount of revenue made from sales minus the amount of returns and allowances. Net sales are important because it shows that the business has the ability to make some money. Net sales also show that the company may have a chance of growing in the future. In any business you are going to have some customers who are not going to be pleased with the product. So these customers will return the product. In terms of the film industry an example of a return would be a producer who is not pleased with the final cut of the film. In order to compensate the producer you would discount the original amount you billed to the producer to make the movie and pay a refund for the difference.

The gross profit is the amount made after you subtract the cost of goods sold. The cost of goods sold is merely the amount the business paid to actually produce the product. For example if a company was selling tennis shoes the cost of goods sold would be the raw materials, wages paid to the employees making the shoes, and other costs associated with production of the shoe.  Once the cost of goods sold is subtracted from the net sales you have the gross profit of the company.

Another important factor is the total expenses category. Total expenses is the brick and mortar of the company in which you breakdown each component necessary to conduct your daily operations. Total expenses will vary according to each type of company. These components will include salaries and wages, rent, insurance, employee benefits, etc. In order to establish an effective business, the business owner must have a clear understanding of what he/she needs to conduct the business as a whole. This is the purpose of the total expenses category.

Net profit is the one category that means the most to any business. Net profit is defined as the total revenue a company has earned over a period of time. This is calculated by subtracting the gross profit from the total expense category (minus the interest of long term loans). Net profit is also called the bottom line. The net profit shows the bank or initial investors whether your company is worth investing in.

 

If you are an aspiring business owner, you must master learning how to read an income statement. Many companies fail because the CEO entrust the reading of the numbers to other people. If you a CEO of a company can’t read the numbers then your company will fail or even worse be accused of ethical violations. The moral of the story is know your business financially or have no business at all.