Do you know your most profitable profit lines?
Do you know how far your sales volume can drop before the figures turn red?
Do you know your break even point?
To have a strong successful business, you need to have a clear understanding of the financial impact that your most basic business decisions may have.
Know Your Costs
We need to control costs. Every business owner needs to have an accurate understanding of how much it costs to produce their goods and services. At the most basic level, you need to be sure that you are selling goods for more than it costs to produce or purchase them, that is, above breakeven point.
Even if you are not competing on price, you want your costs to be as low as possible because anything you save can be reinvested in growing the business through more marketing activity.
Gross Profit Margin
Your gross profit margin is your gross profit divided by sales and expressed as a %. For example if sales for the period are $120k and costs of goods sold are $80k, then you are, left with a gross profit of $40k. In this case, $40k divided by $120k gives us a gross profit margin of 33%. Simple really! But a really important indicator of business health.
If your gross profit margin is declining over time it is a warning that you need to look at:
2. Selling prices
Perhaps the easiest way to keep a lid on costs is to employ some cost cutting strategies.
1. Analyze you profit and loss statement on a monthly basis.
2. Prepare budgets and forecasts and measure against these regularly.
3. Take advantage of early payment discounts.
4. Manage inventory.
5. Brainstorm with the team!
There is a variety of means you can use to identify, analyze and track your costs. Costs have a way of accumulating without you noticing them, even if you run a very small business.
Keeping track of your costs will allow you to frame your business strategy in a way that will protect your profit margin and help you grow your business.