Every entrepreneur wears many hats and has numerous goals and objectives to meet. And at times it seems that many conflict with one another.
As business owners we are all looking for the financial “sweet spot” that can help us meet our productivity and profitability goals. But many small businesses are not trained to understand how to effectively reach their financial sweet spot.
In fact, many businesses do not even know how to determine their best financial sweet spots.
So where do you start to find your financial sweet spot?
What Is Your Financial Sweet Spot
“Business success is not just the ability to grow revenues. It is the understanding of projecting revenue goals to maximize profits and cash flow,” states Dian Wyman of Wyman & Little, Inc., an accounting and financial consulting firm located in Corona CA.
Additionally Wyman noted that “A company must know the key indicator of break-even and its relationship to profit, as well as the amount of collectible profit needed to cover after profit obligations such as, debt, tax and reinvestment.”
To effectively meet your company’s goals you will need to find your “sweet spot” – the ideal amount of revenue you need to produce to provide your business with the profit and cash flow you need.
But how do you figure out what is your financial sweet spot?
Understanding Your Numbers
The key to understand what is really happening in your business can usually be found in your financial statements.
The financial statement consists of an accurate and timely balance sheet, income statement and cash flow statement. Today, it’s a numbers game more than ever and the financial statement is the key to measuring the success of any business no matter the size.
It is important to understand the significance of the numbers and how they integrate.
“A company can be growing exponentially and have profit problems,” states Wyman. “A financial statement if produced accurately and analyzed by a person who understands your industry will identify the issues at hand.”
I can’t tell you how many times I’ve heard the statement, “My business is profitable—so why don’t we have any money?” So now is the time to do year end planning. (See The Major Ramifications of Not Doing Effective Year End Planning.)
A Case Study
To help us understand how this process works Wyman has provided us a simple case study.
To make this easily understandable, Wyman provides an accounting of business flows by using a sample budget represented by 100 pennies. Below are two quarterly reports which show how you can understand the financial sweet spot for 100 Pennies.
Q1 Financial Report – 100 Pennies
When Dian Wyman reviews this company’s financials she notes that:
- Monthly revenue goal = 100
- Monthly profit goal = 10
- Cash flow is LOW. Bank covenants require $.06 as operating cash available and they have $.00.
- Breakeven revenue is HIGH. The actual is 100, the goal is 94.
- Average revenue is GOOD. The actual is 100 and the goal is 100.
- Expenses are HIGH. Expenses are out of line in payroll and rent.
Additionally, Wyman states that under the actual accounting this company is losing $.07 per dollar, and has no cash available. It is operating at break-even. Options available include:
Payroll and rent are too high for revenues produced. Payroll is a variable cost and could be cut to be more productive.
Rent is a fixed cost and cannot be cut. The only solution for bringing rent into line is to increase revenues or cut variable costs.
This level of revenues and expense is not productive and not in either operational “sweet spot.”
When Wyman works with a company, she helps them course correct regularly throughout the year to ensure that the company reaches the goals that they have set.
For 100 Pennies, they did not want to lay off staff and could not cut rent. So they laid out a new course to ensure they meet their goal of 10% profitability, which meant that they had to increase revenues.
A new financial report was created:
Q2 Financial Report – 100 Pennies
When Dian Wyman reviews this company’s Q2 financials she notes that:
- Monthly revenue goal = 110
- Monthly profit goal = 12
- Cash flow is GOOD. Bank covenants require $.08 as operating cash available and they do.
- Breakeven revenue is GOOD. The actual is 101, the goal is 102.
- Average revenue is GOOD. The actual is 110 and the goal is 110.
- Expenses are GOOD. No expenses are out of line.
The numbers came in as planned.
- Revenues, profit and cash flow are in the operational “sweet spot.”
- The business reflects good management and meets CEO, bank and income tax goals.
The company wants to hire additional staff and Wyman shows them that they have to bring in revenues of 120 in Q3 to accommodate new hires and meet their goals.
The Importance of the Financial Statement
Financial statements are a great management tool to measure all business decisions, strategies and goals, as can be seen from the above analysis.
The strength of financial statements includes:
- Understanding benchmarks and key indicators.
- Finding your operational “sweet spot” of revenue, profit and cash flow.
- Providing lenders and investors an accurate and timely statement that meets the required covenants, collateral and debt to equity.
- Income tax planning and tax preparation.
Work with your CPA to develop effective financial statements and work out your financial sweet spots to ensure that 2018 is your most successful ever.
Diane Weklar, the Authority on Accelerating Business Growth, is the CEO of the Weklar Business Institute. She is the author of the award winning book, Mastering the Money Maze: 10 Secrets to Winning Business Financing,which is also an Amazon #1 Best Seller. This book provides practical insight to build a successful business and the practical steps to raise capital to help your firm grow. She can be reached at Diane@Weklar.com.