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Key Numbers to Drive Profit
Do you ever look at the reports from your accounting software or are they meaningless to you?
A typical set of Financial Reports contain a lot of numbers but reading them can be daunting, hiding the critical numbers to success.
So what are the key numbers you should review that will drive your profit?
- Revenue Growth %
- This indicator generally gets a lot of attention and rightly so. The number though should not be looked at in isolation, revenue growth is OK but profitable growth is better.
- Price Change %
- This is the percentage by which the price you sell products either increases or decreases. Small regular price changes are easier to implement that one large change.
- Cost of Goods Sold %
- Cost of goods sold is the cost to get a product or service to market before taking into account overheads. This is an important number as it drives your profitability, a small decrease in COGS can have as much impact on Gross Profit as a large increase in revenue.
- Overheads %
- We often look at our overheads but we should review them as a % of revenue. If you can increase revenue while not increasing revenue your profit will increase, likewise if your overheads increase slower than revenue you will be more profitable. If your overheads rise at the same rate as revenue, you may be working harder for no more profit
- Days Receivable
- This is the number of days on average it takes your customers to pay. The lower the number the better your cash flow. If the number is growing you cash will get squeezed impacting working capital.
- Days Payable
- This is the number of days on average you take to pay suppliers. Small improvements in this area by negotiating better deals can have a huge impact on your working capital position.
- Days Inventory
- This is the number of days on average your stock is sitting in the store room or show room. This ties up cash impacting your working capital, so reducing days inventory by better buying or merchandising can have a big impact on your cash and profit position.
All these numbers are available from your Financial Reports, either from the Profit & Loss or the Balance Sheet. How many of you look at your Balance Sheet each month? Considering I have spoken to numerous small business operators who don’t look at their Profit & Loss report the number is surprisingly large.
Take the time to review the Financial Performance of your business each month, it will be worth your while and will help you trade more profitably.
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See you later.