In our previous blog, we talked about the first ingredient that you as an SMB owner should consider when reviewing the financial reports for your business – which was ‘Profits’. Now in this blog we will delve in detail about the second key ingredient to consider which is ‘Expenses’, and why it is important for you to keep track of the expenses in your business. As it is rightly said that:
Expenses are not something to ignore or to add-on at the end, it is something to keep a track of from the beginning!
A grocery store owner who recently partnered with us was facing a very frustrating, and critical, business challenge. His business was growing rapidly, but he was seeing less and less profits from his business. I have seen this pattern in a lot of businesses, so I was able to quickly provide him with my thoughts on where to look for the true issue.
Did you know?
60% of grocery stores close within three years of their opening because of not tracking their expenses properly!!
The number of customers in his grocery store were greatly increasing and thereby the revenue of the business was also increasing. Since the owner was so happy with the increasing sales, he decided to invest more money into his grocery store – which would probably be the same response from any similar SMB owner. However, what he missed keeping an eye on was the rate at which his business expenses were increasing when compared to his revenue growth rate. Or plainly stated, the expenses in his grocery store were growing faster than its revenue, so he always ended up finding himself in the negative.
So, what’s the solution??
To avoid this situation, you should always keep a close track of your expenses on a regular basis. ‘Total Expenses’ is a line item on the P&L Statement. Be sure to look at not only the total, but also at its trend over the previous 12 months. Compare the expenses trend to the trend in the ‘Total Revenue’ – you should always make sure that your expenses are not growing faster than your revenue. If you are not comfortable in reviewing this yourself on a monthly basis, my best advice is to find a trusted advisor that you can partner with to help you evaluate this and other trends in your business on a monthly basis. This will help you to spot and address those trends before you end up in a financial hole.
Always Remember – “Prevention is better than cure”
In the next blog, I will delve into detail about the third ingredient of a financial report – ‘Accounts Receivable’.