There are four ways to increase revenue and two ways to increase profit. You can increase revenue by increasing the number of transactions per customer, increasing the average sale, increasing the number of customers, and raising prices. You can increase profits by reducing costs and/or increasing prices. Remember that your income is the total of all the money that comes in and your earnings are what is left over after all expenses and taxes.
Most small business owners have an accountant or at the very least use accounting software that can provide financial statements, balance sheets, etc. This is all good! You don’t need to be an accountant to run your business, you do need to calculate and track certain critical criteria. Waiting until the end of your fiscal year to see where you are could be your undoing or you could have changed something you shouldn’t have because you were more successful than you thought.
The numbers to watch closely are found on the following reports: Balance Sheet, Cash Flow Statement, and your Income Statement. Your accountant creates them for you. Hire a good accountant and make sure you understand what you are looking at and what your numbers mean. Learn to read these reports and keep track of the critical numbers so you don’t suddenly find yourself on the brink of bankruptcy. Take bold and immediate action when necessary to continue making progress toward your revenue and profit goals.
3 Critical Financial Ratios to Watch:
Gross margin (also called Gross profit) = Revenue minus direct costs.
Net Income (also called Net Profit) = Income minus all expenses and taxes.
Overhead to Sales and Salary to Sales ratios = Total overhead costs as a percentage of your revenue and total salaries as a percentage of sales.
Now let’s take a look at each of these numbers to understand their importance and how they can affect your business in the short and long term. Your net profit is directly affected by your sales, the selling price, and your fixed and variable costs. Measure your financial performance regularly to get a clear picture of your financial situation before making drastic decisions.
great benefit o Gross margin represents profit remaining after deducting revenue minus direct costs. Gross profit is what you have left over to pay overhead costs. Direct costs are the costs associated with your products and services sold. Direct costs include: cost of purchase or manufacture plus freight, customs, duties, losses, interest paid on financed product, local delivery (if not billed separately), commissions and bonuses, and direct advertising costs (if you assign a cost). of advertising). budget directly to this article).
Your net income or net profit is your bottom line. This is the amount you have left after deducting all expenses and taxes from your total income. Many forget to account for taxes paid. We have to pay the tax collector so this should be counted as an expense.
If he general selling expenses or the Salaries to Sales proportions increase, find out why. Many reasons can affect these ratios. Some are temporary and acceptable. Others may indicate a bad trend. For example, if your salary-to-sales ratio increases because you just hired a new salesperson, this is acceptable and temporary. However, if after a few months this ratio remains high, there is reason for further analysis. Did this vendor sell anything during this time? If so, do your sales from him cover his salary? If the answer is yes, it is an indication that sales from other sources are down. Tracking these two ratios monthly will help you keep costs at a reasonable level and take corrective action before they get out of hand.
“You cannot improve what is not measured.“
Small business owners are bombarded by interruptions. It is imperative to keep abreast of key financial data on a regular basis. Don’t just rely on gut feeling or what your staff tells you. Track these numbers and more to get a clear and unbiased picture of where your business stands. Take immediate corrective action when necessary to get back on track toward your goals.
You cannot improve what is not measured. Manage your finances or they will manage you!