Do You Know Why You Are Making Money?

When sales or profit are decreasing, do you start paying attention to the details in your financial statements? Did you ignore the details when sales were increasing and profits were fine? Have you vowed to pay more attention in the future? If you answered “yes” to these questions, you are like many business owners – large and small.

It is typical of many business owners that when business is good, they tend to ignore the details in their financial statements. Am I spending a bit too much on office supplies? Who cares? I have plenty of money in the bank. Is the annual company party more expensive than usual? Who cares? I have plenty of money in the bank. Do I have more employees than I need? Who cares? I have plenty of money in the bank.

Oh No!!!!! Suddenly there is no money in the bank. Cut costs immediately!!!!! Turn off the lights. Lay off some employees. Print on both sides of the paper. Cut costs !!!! Cut costs !!!! Cut costs !!!!! What happened? Why is there no money in the bank?

It's too late. You should have been doing two things when you were making money. First, you should have asked, “Why am I making money?” My brother’s favorite saying is this …….. “If you don’t know why you are making money when you are making money, you won’t know why you are losing money when you are losing money.” How true.

During good times, most business owners never ask “why?” They simply assume they are making all of the right decisions. They think they are doing a good job. Maybe they are. Maybe they are doing a great job of managing their business …… BUT ….. they need to be sure. You need to ask these kinds of questions:

• Am I making money because of lack of competition?
• Am I making money because of a boom in my industry?
• Am I making money because of one super sales person that I have?
• AM I making money because my product is a fad?
• etc. ..... etc. ..... etc.

Secondly, you need to pay attention to the details even in good times. Some businesses, like individuals, tend to overspend instead of save when times are good. Since they believe that their decisions are the reason for making money and they will certainly continue to make the same kinds of decisions, then they will make money forever. Who cares about spending? Have you used a UNIVAC computer lately? Have you flown on TWA airlines recently? Did you drive to work in your Studebaker today? All of these companies (and many more) made money at one time. Today they are out of business.

The message is this …….. know why you are making money and be as careful with your spending when you're making money as when you are losing money. Don’t wait for the next recession to start saving, cutting costs, and paying attention to every line on your financial statements. Start NOW.