How fast is your company progressing toward its financial goals?
We have discussed your car in great detail. I am going to add two other posts to our car analogy that will help to illustrate the importance of the different Financial Statements.
The Profit and Loss Statement—also know as the Income Statement—is your speedometer telling you how fast you are creating cash. In order to determine this, you need more details.
The two main aspects of a Profit and Loss Statement are Sales and Expenses. The format of the Profit and Loss Statement is a little more complex than that, but those are really the two basic items on the P & L.
The exciting part of this equation is the Sales. This is like the gas pedal on a car. The more sales you make, the faster you are heading toward your financial goals. Your revenue is really no more complicated than that analogy.
The Expenses of your company are like your brake pedal. The more expenses you have, the slower you are going toward your goal. So it goes without saying that the fewer expenses you have, the faster you will go.
Some of the broad categories for expenses include Cost of Goods Sold, Administrative Expenses and Selling Expenses. These are all subtracted from your Revenues to find your Net Profit.
When you subtract all your Expenses from your Sales, you end up with the total amount of money that you have made which is called your Net Profit. Your Net Profit is your speed limit. It tells you how fast you are heading toward your financial goals.
In summary, in order to progress toward you goal faster, your want your Net Profit to be as high as possible. This means you need to back off on the brake pedal by lowering your expenses, and push down on the gas pedal by increasing sales. As always,
Without Foundation, your business fails!