Numbers are extremely important, but, as we've said many times in the past, they don't tell the whole story. A company could look profitable on the outside, but actually be struggling without anyone noticing. How does this happen? By forgetting to look at the whole picture. This is why we always say that every company needs a CPA and more specifically one that will be an advocate for them.
What to look for?
- Just because sales are good doesn't mean that the company is profitable. Sales may be high, but the company may be losing money in other areas causing it to go into the red.
- Look at the product line from start to finish. Again, just because a product is selling doesn't mean that it is profitable. Look at what it took to acquire/produce, hold, market, sale, etc. and then calculate the profit margin.
- Dig into the margins. Knowing the details in and around your margins will help to make it clear whether or not products are priced appropriately and in a way that is sustainable. This can also help to shed light on whether or not one product line is draining the company while another is propping it up.
What to remember: Running a business is difficult and for many it's the second or even third job that they're handling to keep the company going. Therefore, hire an established CPA, ask questions (as many as they will allow...), do your research, and make sure that your accounting software is right for your business i.e. it should be giving you the whole picture.