One of the things we do with our USTaxAid Services clients is look at the stats of their businesses with them. Understanding your own financial statement story can be one of the most powerful tools you can have.
Here’s a true story of how one business recognized a problem before it got too big and also spotted an opportunity that allowed her to grow in the current economy.
A jewelry designer could tell her business was struggling, or about to, without looking at her financial statements. Sales were down. The bank accounts and reserve funds were dwindling. She designed and manufactured affordable jewelry and thought she was fairly recession proof because every woman (and some men) wants to look glamorous. Her prices were affordable and so she thought the business would keep coming.
But the recession hit, perhaps harder than she thought, because her jewelry was featured in kiosks in airports. And travel was down. She was also getting hammered by competition from eBay sellers and other online auction sites.
By reviewing her financial statements, she could tell how long she could last with her dwindling cash reserves. It gave her a little time to try out some new ideas. One of those ideas was to create a wholesale division. It would cut her profit down, because the price was lower, but it would generate cash in the door.
She tried a couple of different wholesale approaches, and tracked the gross profit margin closely on each venture. Because she watched the financial statement stats closely, she knew what her breakeven point was and how low she could go on prices.
One of the things she discovered was that it was better for her to get paid up front, but only if they used a credit card that didn’t have a high fee.
Within 3 months, she had more than replaced her lost retail revenue and her business had turned the corner so that it was growing again. By going with a wholesale model, she was able to greatly reduce her costs and that meant more to the bottom line, even though the sales price was less.
There are two reasons you need financial statements: To assess the present and predict (and prepare for) the future.
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