The art of knowing your bottom line just by looking at your top line.
“What you measure affects what you do; if you don’t measure the right thing, you don’t do the right thing.”
Did you know that according to YourStory, the year 2020 has a lot of lessons, drawbacks and uncertainty lined up for an average of 50% of startups? This information does not only make it a need for budding entrepreneurs to find solutions but also put them into action. The recent webinar held by Headstart was not only eye-opening but also extremely engaging and interactive.
The learning and key takeaways from the webinar seemed to stretch way beyond the topic at focus – giving the viewers a chance to learn and try their hands at accountancy from one of the bests.
We had with us Mr. Lamba, with around two decades of experience in both Accounting and Finance. He has not only sold around a million copies of his bestseller – Romancing with the Balance Sheet but is also a charted accountant and a finance literary analyst. He has written several books and over 1500 articles. He gave us an interesting insight into the world of finance and in his words, a few tips on flirting with accountancy the right way!
Cost Management Strategies were one of the many aspects that Mr. Lamba thought was important to understand and comprehend, especially in tough times like right now. He referred to the bottom line as a black hole and talked about what scares him – the fact that even the top Senior Businessmen do not know the amount of Profit/Loss they have made unless detailed reports are not published by the Accounting team. He finds it disappointing that the Sales driven companies monitor their top line on an online basis. It almost feels as if the digital era has rid the employees and seniors of any responsibility that they themselves should have owned up to.
After giving a detailed problem statement, he moved on to finding a solution. The solution was simple – we should ourselves be aware of the bottom line of the business and use the accounting reports for nothing more than verification. While there can be a tolerance level for 5-10% error, what is more, important is that we know how to figure out the Profit/Loss on our own. He further moves on to give the viewers a reality check on how role models like Amazon and Flipkart have no idea about their bottom line either. A brief overview of developing tools and techniques at your disposal was talked about.
Variable Costs and Fixed Costs are two of the most important terms that we need to be in sync with. While Variable Costs vary with the amount produced, Fixed Costs remain the same no matter the amount of output produced. These terms break the costs into nature-wise types and make it easier to figure out a Profit/Loss.
When do organizations make profits? – A question that is highly debatable because while some give a common-sense answer, others prefer an accounting one. There is often a conflict between the two points of view. On one hand, common sense says that if our Fixed Costs go down, profits increase and on the other, the latter says the opposite. In all of this, the key learning is that we should always go with our instinct and trust the common sense answer.
The Leverage Effect refers to denoting a disproportionate exponential impact on the bottom line because of certain changes in the top line. Mr. Lamba feels disappointed talking about how the world interprets this term in a very narrow manner – mistakingly thinking that this effect takes place when companies are borrowing more money. There is a need for leverages to be built in every business.
Highly Leveraged, Highly Risky is the motto Mr. Lamba believes in.
The image above is much more than what it looks like, it gives a simple yet useful answer to what we should and should not resort to in our tough days –
- Debt for happy days and equity for sad days.
- Salary for happy days and incentives for sad days.
Reexamining every head of finance is another aspect of Risk Management. Financial management should be dynamic and flexible enough to change according to the situation. Since we particularly have a lot of time on our hands right now, it is important to plan an expansion and figure out where the money will come from. The sources can only be two – either raising it on your own or taking a loan from a bank.
Contribution is a term widely used in accounting and is highly dynamic. It refers to the difference between the variable cost and the total sales made. Narrowing a gap between contribution and fixed cost can be tricky but is equally important to understand –
- If the fixed cost is higher than the contribution – the company makes a loss.
- If the fixed cost is lower than the contribution – the company makes a profit.
- If the fixed cost is equal to the contribution – the company reaches the break-even point.
In simpler words, there is the top line and then there is the bottom line; what is in between is known as contribution.
The session in totality did not only generate interest but also lifted a lot of spirits. It all comes down to the ability of startups as well as large businesses to understand the impact of the Bottom Line. The most important ability is to know things at the same time when they are actually happening instead of waiting for someone to do it for you.
To sum it all up and put it all into perspective, you only just have two options at the end of the day. Either you can carry on doing the great work that you are doing or you can go into the field, assessing and analyzing the competitors to come up with even greater quality of work. Even though there will be times where you will have to sell at a negative profit and that is fine. However, no matter what you do; never sell at a negative contribution.
Volunteer- Headstart Gurgaon