Not A Numberphobe
If the following sentence doesn’t automatically translate for you, then you’ll appreciate this Journal entry that much more…
You don’t run your business on net revenue, you run your business on gross margin.
Granted there are no numbers in this statement, but the phrases “run your business,” “net revenue,” and “gross margin” really make me feel like I have no idea what’s going on… Did I say “make”?... I mean “made”!
::record scratching sound::
That’s right! I understand that sentence. Present tense! Ready for these uber-basic definitions:
Net revenue: the amount of money that you bring in as sales.
Gross margin: the amount of money you have to pay your operating expenses.
Operating expenses: the amount of money you need to keep your (proverbial) doors open.
Run your business: the idea of keeping your (proverbial) doors open.
So when a Shark on Shark Tank asks the entrepreneur in front of them the following series of rapid fire questions, you too can understand!
“How much in sales?” “What does it cost you to make the product?” “What’s your gross margin?”
The Shark wants to understand how much of the money that comes in via sales is actually left over after you’ve paid to put your product on the shelves. Yes, it is possible for you to bring in lots of money via sales and not actually be making any money to take home at the end of the day because you’re spending it all and then some on actually making the product… Omigod! Yes!
If you’d like to enjoy this same sense of mental clarity, read Accounting for Numberphobics. The mantra of the book is: “Every product or service must have a gross margin of at least 30% of net revenue or 45% above the cost of goods sold.” Dawn will take you through the Net Income, Cash Flow, and Balance Sheet, relating each statement to a different dashboard in the car (speedometer, gas, and oil pressure, respectively). You’ll finish the book with a better understanding of both your financial documents and your Mini Cooper.
I have verified what I knew all along: As long as I understand how to use and interpret the information that is in front of me, I can talk numbers all day long. Who is numberphobic now?!
Professor Block*, are you ok?
*My Accounting Professor