What you can learn from your Business Numbers
Many people only pay slight attention to their financial reports a small number of times a year. Usually this coincides with the preparation of annual accounts and the dreaded income tax return. But by understanding some of the basics of financial reports, you can really start to make some clear and well informed business decisions.
Before we get too far ahead of ourselves, it’s important to understand some basic terms.
Gross Profit: This is sales less the Cost of Goods Sold
Net Profit: Gross Profit less all other expenses
COGS: Cost of Goods Sold – these are the inputs that go into making a product; they are direct variable costs such as Materials, Direct Labour and Direct Freight.
So how can understanding all of these numbers actually help your business?
How about being able to work out your Break Even point on a daily, weekly or monthly basis?
Break Even is the point at which your business neither makes nor losses money. It’s important to know, for example if you are a retailer, how many dollars of sales you need to make on a weekly basis before you even start to make a profit. To calculate you need to know your Gross Profit % (Gross Profit divided by total sales) and your total expenses (excluding your COGS as these are already included in your Gross Profit %).
Formula is: Total Expenses / Gross Profit % x 100/1
Then simply divide by 12 (monthly) or 52 for weekly – you now know what level of sales you need to generate to break even.
By knowing and understanding these key numbers you can make decisions that lead to greater profits. Some options are:
– Increase sales above the breakeven point
- If you have a number of products a good idea would be to work out the Gross Profit Margin on each and then concentrate sales on the higher margin products
– Review your sales prices
- Use benchmarking data to see where your Gross Profit Margin compares to your competitors.
- Can you increase your price
- OR are you paying too much for inputs and can grow profits through negotiating better supplier agreements.
– Review other overheads
- Again benchmarking can be really helpful here. Are you spending too much in certain areas of your business compared to your peers? Main items are generally
- Rent per $ of sales
- Wages per $ of sales
Now that you have some basic knowledge, find your latest financial statements and calculate your business numbers.
Business Consulting | The Money Edge | Bundaberg