Running a business is a complex enterprise. In order to look at the big picture in your business, you need to know the answers to some basic financial questions. It is not enough for your accountant to know this information. Business acumen requires you to be aware of these answers so that you will be able to guide your company to success.
What Makes My Company Money?
The purpose of every business is to make a profit. You need to make money in order to survive, but in order to do this; you must identify what makes your company money. You need to examine your products and services to determine which ones are actually making money for the company. For example, a bakery makes croissants, cookies, and cakes. The croissants account for 80% of the sales, and the cakes make up 15% of the sales. Cookies make up 5%, and some days most of them are thrown out. Knowing what makes your company money will provide influence and help steer the future of the company.
What Were Sales Last Year?
Companies need to grow to stay competitive. You are able to identify growth only when you see an increase in sales over time. Knowing last year’s sales is essential to understanding the current status of your company. For example, you should use last year’s sales to calculate the rate of change.
What is Our Profit Margin?
Every business needs to make a profit. The profit margin indicates how well the company is running. A large, successful company typically has a 13% net profit margin. The higher the profit margin, the more efficient the business is run. There are two types of profit margin: gross profit margin and net profit margin. Both are found when the profit is divided by the total revenue. The difference between the two is that the net profit margin is profit after tax and operating costs.
What Were Our Costs?
A company’s costs affect other financial aspects such as profits. This is why it is so important to control costs. Many companies choose to increase profits by cutting costs. However, this can backfire when the costs you cut directly affect the customers’ experience.
- COGS: Cost of goods sold is also called direct cost. This includes costs associated with production, materials, labor, inventory, distribution, and other expenses. The individual COGS must stay below the sale price to make a profit.
- Operating expenses: Overhead expenses are included in operating expenses, which is any expense necessary to keep the company running that is not COGS. Examples include support function salaries, rent, marketing, R&D, utilities, equipment, travel, etc.
- Interest and other expenses: Interest on loans or investment losses are not part of running the business from day to day, but they affect the bottom line. Other expenses include lawsuits and selling an asset.
- Taxes: Federal, state, and local taxes are unavoidable costs of doing business.