A small business owner often has plenty of things on his plates. Often, owners have so many tactical decisions to make that they miss the forest for the trees, focusing on short-term concerns and neglecting factors that drive broader trends in their business.
For example, it is easy to set aside financial reports when you cannot translate the numbers into insights about a company’s health and value. If you’re a business owner, here are numbers you should always be looking at when deciding on your company’s direction.
Sales or Revenue
Sales are the building blocks of a company; the money a business generates allows it to function every day. Business owners need to know how much money they should make to earn a living, pay their employees, and keep growing the business.
Increasing sales and revenue is a crucial aspect of the business, but focusing solely on it will be detrimental to long-term growth. Pushing sales volume doesn’t equate to profits if you have to increase spending as well. Get the results you need by hiring accounting services. A good accountant will enable you to translate data from sales volume into actionable insights.
Gross Profit and Gross Margin
A profit and loss statement will show your business revenue, variable expenses like the cost of goods sold, fixed expenses like rent, and your net profit. To see how much your business is earning, you need to calculate your gross profit and margin.
You calculate the company’s gross profit by taking the total revenue and subtracting the variable expenses. This number shows you what it costs to sell your product or service. Meanwhile, the gross margin lets you measure your efficiency. Below is the formula for finding your gross margin:
Gross Margin = 1 – (Cost of Goods Sold/Total Revenue) x 100
Low gross margins mean you need to reduce your costs, while higher gross margins mean you are earning as much as you can. When both gross profit and gross margin increase, your business becomes healthier.
Note that there isn’t a magic number for your gross margins. You need to adjust your goals periodically and avoid driving gross margins so high. If you focus on gross margins only, you will sacrifice product quality or customer service, which will affect people’s perception of your brand.
You can calculate your actual or net profits by subtracting your variable and fixed expenses from your revenue. A company’s net profit is the money it has to pay for
Your net profit is the money you have available to pay yourself and invest in future ventures. It also represents the figure that you need to pay taxes on at the end of the year.
Often, first-time business owners do not file their taxes properly, leading to penalties and fees during tax season. Creating a plan for taxes prevents you from getting saddled with unnecessary expenses due to non-compliance. Consulting a tax professional is your best course of action because many variables go into calculating taxes.
You have to account for deductions, tax credits, income tax, self-employment tax, your tax bracket, and other matters, so sitting down with an accountant will help you make sense of the many payments you have to make.
When you track your revenue, gross margins and profits, net profits, and tax dues, you will have a better picture of your organization’s financial health. These numbers let you generate reports and identify trends in your business. Periodically evaluating them allows you to capitalize on strengths, mitigate weaknesses, and drive business growth.
Make Bianchi & Associates be your partner in building your business. We are a Rochester, NY accounting company providing consultations on business sales, systems design, implementation, and much more. Contact us today to get started!