Numbers are the language of business. One of the reasons why successful business owners stay profitable is they have a clear overview of their financial standing.
If you’re trying to grow your business, your profit and loss report is a great place to start looking at to make decisions. Don’t do what most new business owners do and focus on cash because that is a recipe for disaster.
1 - Focus on Margin
Figures is common and much needed as a basic means of measuring your business profit. Just because your sales are up doesn’t mean your business is profitable.
Tracking your sales by margin will help measure how much money your business is actually making on each dollar sale.
You must also keep in mind that as your sales increase and your business grow the more likely your margin will shrink because you are probably hiring more people, investing in bigger facilities or equipment and expanding your product lines.
When your margin is low, you are not getting the best ROI for the expenses of your business. To improve your margin you have to streamline your operations and find a way to keep your costs low.
2 - Understand Fixed Cost
It is essential for every business owner to understand the nature of the fixed costs they are incurring because it directly influence their profitability.
Your fixed costs will stay the same regardless of how much or how little you sell. This includes expenses such as rent, utility bills, equipment leases, small business loans, insurance, labour costs, and subscriptions.
Your fixed costs are necessary expenses you need in order for your business to operate. It is important to keep control of these expenses and not let them blow out as they are often the most challenging to reign in.
3 - Know Your Break Even
A business could be turning over a lot of money but still making a loss which is why it is critical for any business to determine what sales volume is necessary to cover costs.
Knowing your break-even point will help you assess the true cost of doing business. It will also help you with the decision-making process.
When your sales exceed your break-even point you are making a profit.
It’s easy to calculate your break even if you know your numbers. Your Fixed Costs plus Operating Costs all divided by your per unit sale margin will tell you how many sales you need to make to break even. If that figure is unrealistic something needs to change. Either increase your margin, increase sales or trim costs. Understanding the magic formula that works for your business will determine your success.
4 - Identify Bad Expenses
Expenses have an impact on your profit, as a business owner it is important that you are tracking your expenses on a regular basis and look for ways on how you can cut back on expenses that are not necessary for your business operation.
Are you spending money on unproductive expenses? Unneeded subscriptions, too much rent, staff that are not pulling their weight or maybe its marketing expenses that are not delivering. Managing these can be a lot easier than trying to generate new sales.
5 - Never Forget Cashflow
Controlling accounts receivables is always a challenge for any small business, especially when dealing with their big customers.
Losing control over your receivables can dramatically impact your business’ cash flow. The longer you let your receivables slip, the more damaging it can be to your business.
To get hold of your uncollected receivables make sure your billing policies are clearly communicated to your customers. It’s also a best practice to send a payment reminder to follow up on the client’s outstanding invoice.
Incurring late interest fees can also help you improve your collect just make sure that this is discussed up front and is included to your payment terms. You can also consider offering a discount if they pay the bills before it’s due.
Need help in preparing your profit and loss statement? Our team of experts here at Bookkeeping Central can assure that your financial reports are accurate that will help you make a better decision. Give us a now at 1300 855 763 or you can book a FREE appointment withus here!
