Business Analysis: Become A Numbers Person
Most entrepreneurs are motivated by ideas, concepts, hopes, desires, and optimism. They like to interact with people, to market and sell. They enjoy negotiating, communicating, and persuading. They are action-oriented and like to be in continuous motion. They start early, work hard, and stay later.
But most entrepreneurs are not “numbers” people. They have little patience for the details of financial statements and accounting. They are eager to get on with the business of meeting with people and selling the product. In fact, for most entrepreneurs, dealing with numbers is irritating and frustrating.
But nonetheless, for you to move solidly along the way to wealth, to become a successful entrepreneur, and eventually, a self-made millionaire, you must master the numbers in your business. You can hire bookkeepers, accountants, and financial advisors to help you, but you can never abdicate the responsibilities of fully understanding every penny and every dollar that comes in and out of your business.
Get the Facts
It is absolutely essential for your success that you know the financial facts of every aspect of your business, especially your costs to produce and offer your product or service and the prices you charge for what you sell. It is amazing how many businesses, large and small, are operating on the basis of false assumptions and incorrect numbers. Sometimes they joke and say, “We lose money on everything we sell, but we make it up on the volume.” But this is not a joke.
Determining Your Costs
Often the person who makes the fewest mistakes in business is the one who succeeds the most. You don’t have to be an entrepreneurial genius to be successful. You just have to master your numbers and know what you are doing.
You have heard the old saying “You can’t get there from here.” When you do an accurate cost analysis for a new product or service, you will often find that, based on what you can change for that product or service in the current market, you can’t make a profit on it. It makes no sense to go through all the time and trouble of bringing this product to market because the return is too low. The potential for loss is too high. The possible profits are not as great as you could earn by offering something else.
There are several costs that you must consider:
- Direct costs: These are the costs of goods sold. If you make a product or buy it from a manufacturer or distributor for $5, including all costs of shipping and transportation, insurance, and delivery and you sell the product for $10, your cost of goods sold is $5. This is fairly easy to calculate.
- Indirect costs: These are the costs that are attributable to all of the products or services that you sell, not any specific ones. Indirect costs can be costs of salaries, rent, telephones, utilities, marketing, advertising, shipping, delivery, and many others.
- Fixed costs: These are the costs that you incur each month whether or not you sell a single item or generate a single dollar of revenue. Your fixed costs include salaries for your permanent staff, rent, utilities, many operational costs, and the costs for outside services, plus your own personal income from the business.
- Variable costs: These are the costs that increase or decrease depending on your level of business activity. These costs are incurred only when a sale takes place. They can include costs of goods sold, sales commissions, delivery costs, and other costs that can be attributed, directly or indirectly, to the cost of each product or service you sell.
- Sunk costs: These are expenses that you have incurred that are gone forever. They can never be recovered. They are like an unattached anchor thrown overboard that sinks to the bottom of the ocean and is irretrievable.
Building a business is often a sloppy affair. No matter how smart you are, you will buy products that you cannot resell, that no one wants at any price. You will buy furniture that will turn out to be of no value to you. You will run advertisements and engage in other costs that, in retrospect, were a complete waste of money. In building a business, these mistakes are inevitable.
But it is essential that you recognize them for what they are–sunk costs. The money is gone forever. You cannot recoup it. You must not spend a single dollar attempting to compensate for a financial mistake in the past. Focus on the future and on sales and profits. Let the sunk costs go.
I hope you enjoyed this post. Feel free to share it with your friends and leave a comment below.
About Brian Tracy — Brian is recognized as the top sales training and personal success authority in the world today. He has authored more than 60 books and has produced more than 500 audio and video learning programs on sales, management, business success and personal development, including worldwide bestseller The Psychology of Achievement. Brian's goal is to help you achieve your personal and business goals faster and easier than you ever imagined. You can follow him on Google+, Twitter, Facebook, Pinterest, Linkedin and Youtube.