To make sound decisions consistently, it is essential to keep accurate financial data. The most basic financial information is an income statement and a balance sheet. The income statement, also known as a profit and loss statement, will record revenue coming into the organization, cost of goods sold, operating costs, and net income. This information is useful in linking the activities of a company to profitability. A balance sheet illustrates the overall health of an organization by describing a company’s assets (like cash and equipment), liabilities (whom the company owes), and equity in the company. Equity is determined by simple arithmetic, assets – liabilities = equity. Generally speaking, positive equity is good and negative equity is usually less than good. The income statement and balance sheet should at least be reconciled (produced) monthly. It is less common but a best practice to reconcile financials daily; usually requiring a designated staff to carry out daily reconciliation.
Well run companies adjust the operating costs of their business when an economy cycles down. Many tactics exist in addition to laying-off staff in order to survive a difficult economy. A business may negotiate with vendors to lower their cost of goods sold (COGS). COGS are the materials necessary to sell a product or service. Take for example, a seafood wholesaler offering a product. COGS include packaging material such as boxes, in addition to fish. A wholesaler may be able to lower the cost of boxes by discussing volume with their supplier(s) to negotiate a discount. The income statement is useful in determining the quantity of boxes consumed per year by the wholesaler -a handy piece of information if asking for a price concession from a vendor. The vender is better able to work with a customer if that customer can demonstrate their need, in numbers, for a specific product. With this information a vendor is then able to quantify and calculate the profit of a relationship and then come to a decision. Alternatively, without good information the decision often is deferred, taking much time or not happening at all. The balance sheet helps a business owner know if (s)he has enough cash to buy the boxes at the beginning of the year or if they need terms to pay for them at some later point in time; a critical component to understand when negotiating a better deal.
The lifeblood of a company is cash and the best way to generate cash is by increasing sales. Increasing the commissions paid to a sales force and adjusting salaries is a useful tactic to reduce fixed carrying costs of operations and grow sales by aligning employee financial incentives with company objectives. Increasing commissions provides employees the opportunity to make more money than if they were salary only while providing mutual benefit to the company –everybody makes more money. Generally speaking, a sales force produces better results if financial incentives are aligned with outcomes. A sales person with a 10% commission on every sale is less motivated than a salesperson with a 20% commission. Additionally, aligning sales force compensation with company objectives by adjusting salaries is often a positive move to help a company survive a tough economy; conversely, taking no corrective action with the combination of continued losses will consume cash and result in insolvency whereby everybody loses because the company fails. Some organizations with a designated sales force are commission only or offer a base salary to cover essential living costs, providing stability during fluctuations in production. The income statement allows the organization to determine an appropriate compensation strategy whereby the salesperson and organization split profit. The balance sheet helps determine when a salesperson gets paid for their production based on how revenue is collected and cash available to pay commissions.