Measuring is Knowing
I lived in the Netherlands for 11 years and the Dutch have a saying "Meten is Weten" which means "Measuring is Knowing”. In business, I translate this to "Know Thy Numbers"! I have been working with entrepreneurs and small businesses at the Florida SBDC at UNF for over five years and I am still surprised at how many business owners do not have a handle on managing and administering their finances. I would like to share with you what I call the “5-Line Income Statement”. Author Sara Schafer’s Equation for Business” states:
Sales - Cost of Goods Sold (Variable Costs) = Gross Margin – Overhead (Fixed Costs) = Profit (Net Margin)
If you know these numbers you can also calculate your break-even sales number in two steps. First you have to figure out your contribution margin (cm) which is your gross profit divided by your sales. This is the percentage of every sale you have left over to pay (contribute to) your fixed costs. This is also known as gross margin. Then you divide your fixed costs by your "cm" and this gives you your break-even sales number. The break-even calculation is handy because you can use it to see how much you have to increase sales to cover an added expense (fixed cost) of something (like a new employee or piece of equipment). Many business owners are successful in spite of their financial illiteracy, ignorance or apathy. They got lucky. Other business owners skilled in financial management have built sustainable enterprises where others would have failed. Which one are you?
by Mark Yarick, Business Consultant, Florida SBDC at UNF
