Yes, if you have no planning, or you are simply reacting to everyday challenges, you’re simply taking away your own money! To take back your money, respond, don’t react. You can choose to over-respond if you like. Like faced with a new competitor, you can simply react by cutting your price, or you can over-respond by always maintaining an USP so that there is no real competitor.
The “plus” side of your Net Worth is found in things of real value to the marketplace; things like your 401-k and IRA accounts, certificates of deposit (CDs), cash in the bank, equity in your home, cars you own, collectibles you could sell, and debts other people owe you.
This is a good number to scrutinize each month, and to track in terms of percentage to total sales over the course of time. The higher the better with gross margin! You need to have enough money left at this point to pay all your indirect costs and still end up with a profit.
Well, banks like to see that the cost of your monthly mortgage payment, taxes, insurance, and utilities will not place an undue burden on your finances.
Being able to track a declining margin can give you a heads-up that you must adjust your prices or your costs. In the worst cases your gross profit and profit margin disappear altogether. At that point, you’ll be like the fellow who lost money on every sale but figured he could make it up in volume. Don’t do it.
It’s also important to see how the company uses that cash. Digging into the cash flow examples to find out where the money’s going can shed light on management’s strategy and give you additional insight into the company’s future. Is it building aggressively for the future by opening new stores or building new manufacturing facilities? Is it buying other firms, paying off debt, building up cash reserves, buying back stock, or paying dividends?
DOUBLE-ENTRY ACCOUNTING: An accounting system used to keep track of business activities. Double-Entry accounting maintains the balance Sheet: Assets = Liabilities + Owner’s Equity. When dollars are recorded in one account, they must be accounted for in another account in such a way that the activity is well documented and the balance Sheet stays in balance.