Revenues

Financial Statements: What to Watch out for With Your Revenues

The Hartford

Transcript

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Gene (00:04):

Hey everybody, this is Gene Marks and welcome to my weekly Small Biz Ahead podcast, offering some advice and tips and help to assist you in running your business. This week, I wanna talk about your revenues and I wanna give you a little bit of a warning. There’s something very misleading about your financial statements this year, and I’m not sure if you know why, but here’s a hint: It does have to do with your revenues. Let me explain. I was recently at a client’s office to review their June 30th financials. And guess what? By the way, this was mid-year. It wasn’t their full year, but it was the six months ended June 30th. I’m I’m here now in July. Guess what? Well, my client happily reported to me that her revenues were up over 10%. She was crushing it.

Gene (00:52):

That’s what everybody thought. Well, not so fast. I mean, it’s true that despite the warnings of a recession and some negative economic data that’s going around, we’re all aware of that. A fair number of my clients who’ve actually been doing pretty okay, this year. I mean, that’s not to say that they’re concerned about the second half of 2022, but at least for the first half, I can be many who had an increase in their sales revenues. I mean, good for them. Good times. Good for her, right? I mean, if you’re increasing your sales revenues, that’s certainly good for your business, but hold on. Let’s not fool ourselves. I mean did my client really have an increase in sales? Well, when I dug deeper into this particular client’s numbers, I saw the truth and the truth…

Gene (01:37):

Wasn’t pretty. The fact of the matter is, is that her sales didn’t really increase. What increased was prices. That’s because we’re in inflationary times, right? The producer price index, which is the barometer of cost for many of the B2B companies that I serve is up over 11% year, over year. But even that’s masking even higher prices and core raw materials. For example, the cost of industrial chemicals and construction materials and iron and steel and aluminum and shipping. These costs have risen anywhere from 15 to 40% over the past year. Labor is up 5%. I mean the average national hourly pay is now at about $32. Now my client being the smart business person that she is, has adapted to this new reality. She’s been keeping a very close watch on her overhead, but as raw material and production costs have eaten into her margins, she’s been forced to raise prices herself. In many cases, between 10 to 12%. She started doing this at the beginning of the year.

Gene (02:41):

And she’s continued to be doing this through the middle of the year through June 30th. So now that you know that, what have you figured out about her sales? Yeah, that’s right. The increase in revenue was really just due to price increases caused by inflation. And it was done to maintain margins. To say that her sales revenues are up is well kind of misleading, but that’s what many companies are right now are doing. They’re telling their banks and their shareholders that they’re growing. Growing because sales are growing. But really sales in many cases, aren’t growing that much, which means that if you’re a reader of financial statements, you’d better be asking some hard questions. And the hardest question is this: What were shipments like this year compared to last? What number of goods were sent out the door? Or if you’re a service firm, what were the billable hours this year compared to last year?

Gene (03:37):

These guys are the real numbers that define growth in an inflationary period. We can’t rely on dollars because the dollars are inflated. So we have to focus this year on quantities, units, boxes, pallets, rolls, grosses, feet, yards, cases, time. These things are not subject to inflation. They are the true metrics of sales revenues in 2022, not dollars. So listen everyone, don’t be like my client. Don’t fool yourself into thinking that your business is growing when all you did was increase prices just to keep up with inflation. Measure activities and things, ignore the money this year. That’s the way you could really track how things are going and recognize any potential issues before they become real problems. I hope this information helps you and also helps you track how your business is going. It should also help you read not only your financials, but other people’s financial statements with a little bit more accuracy as well. My name is Gene Marks. You have been listening to The Hartford, Small Biz Ahead podcast. If you’d like more advice or help or tips for running your business, please visit us at SmallBizAhead.com or SBA.TheHartford.com. Thanks for listening this week. I’ll be back with you next week with another little tip to help you run your business that much better take care.

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