A good friend sent me this article recently from AgWeb and it is worth sharing. The title is The Greatest Skill for Young Farmers. I consider it the greatest skill for all entrepreneurs. I have been working with entrepreneurs and small business owners for the last 5 years and am still surprised that so many are indifferent to and/or illiterate in their financial administration and management.
The author, Sara Schafer, shares the "Equation for Business" from Gary Matteson, a Farm Credit VP.:
| Sales | |
| - | Cost of Goods Sold (Variable Costs) |
| = | Gross Profit |
| - | Overhead (Fixed Costs) |
| = | Net Profit |
This is what I call "The 5-Line Profit and Loss Statement" or "The 5-Line Income Statement"
If you know these numbers you can also calculate your Break-Even sales number in 2 steps.
First you have to figure 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).
The Dutch have a saying: "Meten is Weten" which means "Measuring is Knowing." In business, I translate this to "Know Thy Numbers!"
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?
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