Business Alchemy 101 Index

through our series of lessons


Learn how your business can be transformed into a thriving and successful enterprise through our series of lessons designed to help Salt Lake City business owners understand how to manage their finances effectively.  Take away the knowledge of the experts.

Okay, so this is the last post on profit.  I want to address in this post the more familiar version of reporting profit, which is the Income Statement. I have already explained how an Income Statement can be used and what it means.  When you dissect this Statement a little bit more you can find some more useful information. Going back to the Thanksgiving dinner analogy and my mother's pies, you remember that some of my siblings come with their families and some don't depending on what is going on with the in-laws.

Sales Ratios are where Sheldon Gates begins his book and for good reason.  Nothing happens in a business until a sale is completed.  Until that point in time, you are merely spending money, not operating a business. The first ratio that 101 Business Ratios introduces is the Sales Growth Ratio. Growth may not always be a good thing for a company, but increasing sales will at some point be necessary in order to build a larger company.

One last note on understanding ratios.  It is important to understand the difference between vertical and horizontal comparisons with ratios. Suppose you were to take your Profit and Loss Statements for the last three years and place them on the table next to each other.  If you wanted to use a highlight marker to mark the Gross Revenues for each statement, you would start at the statement on the left, find the Gross Revenue and mark it and then you would move HORIZONTALLY to the next statement, find the Gross Revenue, mark it and move to the last statement in the same manner.

Budget Compliance--Sales is a simple ratio to understand. This is simply a percentage that compares the budgeted sales with the actual sales. I used to go to the local amusement park when I was little and play that game where you throw the baseball at the catcher's mitt two times and then have to guess the speed of the third throw to win a prize. Budget Compliance--Sales is like that game. I will explain this more in the next post.

Here is the equation for Deflated Sales Growth: 100 X[ [(Net Sales X (Price Index Last Year/Price Index))-Net Sales Last Year]/               Net Sales Last Year] The top portion of the equation is asking first to find out what a dollar is worth this year compared to last year. This can be found at You want to look up the index number for last year and for this year and you are going to find a ratio (Price Index Last Year/Price Index) which will tell you that the value of a dollar is either more or less than it was last year, and by how much it is different.