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| Profit Orientation |
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Adapt these suggestions to your situation. They should help you call the shots to keep your company headed in the right direction - toward profit.
Know Your Business
The saying "Knowledge is power" is especially pertinent to the owner/manager of a small or medium-sized business.To keep your company pointed toward profit you must keep yourself well informed about it. You must know how the company is doing before you can improve its operation. You must know its weak points before you can correct them. Some of the knowledge you need you pick up from day-to-day personal observation, but records should be your principal source of information about profits, costs, and sales.
Know Your Profit. The profit and loss statement (or income statement) prepared regularly each month or each quarter by your accountant is one of the most vital indicators of your business's worth and health. You should make sure that this statement contains all the facts you need for evaluating your profit. This statement must pinpoint each re venue and cost area. For example, it should show the profit and loss for each of your products and product lines as well as the profit and loss for your entire operation.It is a good idea to have your profit and loss statement prepared so that it shows each item for the current period, for the same period last year, and for the current year-to-date. For example, a P&L statement for the month of November would show income and expenses for the current month, for November last year, and totals for the eleven months of the current year. Many corporations publish their annual reports with several previous years so stockholders can compare earnings.Comparison is the key to using your P&L statement. If your accountant is not already furnishing figures that you can compare, you should discuss the possibility of having them provided.
Financial ratios from your balance sheet also help you to know if your profit is what it should be. For example, the ratio of net worth (return on investment ratio) shows what the business earned on the equity capital invested.
Know Your Costs. You should know costs in detail. Then, you can compare your cost figures as a percentage of sales (operating ratio). Be certain that your costs are itemized so that you can put your fingers on those that seem to be rising or falling according to your experience and the cost figures of your industry. When costs are itemized, you can spot the culprit when the overall figure is higher than what you had budgeted. Take advertising costs for example. You can catch the offender if you break out your advertising expenditures by product lines and by media. In addition, a thorough check of inquiry returns from advertising will help to avoid unproductive publications.
In knowing your costs, keep in mind that the formula for profit is: Profit equals Sales minus Costs.
Know Your Product Markup. Be certain that the pricing of your products provides a markup adequate for the kind of profit you expect to achieve. You must keep constantly informed on pricing because you have to adjust for rising costs and at the same time keep prices competitive. Knowledge about your markup also helps you to run close outs with your eyes open. Continuing to make a product that only a few customers want is an effective merchandising tool only when you use it on purpose - for example, to hold or attract buyers for other high markup products. Don't hesitate to drop a loser from your line.
Garbage-In, Garbage-Out. An owner-manager should not fudge the records. The acronym GIGO that the computer industry uses is true with manually kept records as well as with machine-processed ones. If you allow "garbage" to go into the records, the reports will contain "garbage." Reports need not be extensive but they must be accurate.
Look For Trends. Try not to look at a single month's sales or profit picture by itself. The figures on your operating statements are meaningful only when you put the picture in the right frame - that is, look at your figures in the context of what has happened and what is likely to happen. In that manner, you catch a downward trend before it gets out of hand.
You should also concern yourself with the figures behind the dollars - for example, the number of units sold or the number of orders. Insist on cost-per-unit statistics. The fluctuation of the cost-per-unit can be much more meaningful than just looking at the dollar figures alone. Another idea is to display these comparative figures on graphs so that significant trends can be seen easily.Predict Your Future
Don't use a crystal ball to make forecasts of your business. By carefully analyzing the historic trends of your business, as shown in your records for the past five years, you can forecast for the year ahead. Your record of sales, your experience with the markets in which you sell, and your general knowledge of the economy should enable you to forecast a sales figure for the next year.
When you have a sales forecast figure, make up a budget showing your costs as a percentage of that figure. In the next year, you can compare actual P&L figures to your budgeted figures. Thus, your budget is an important tool for determining the health of your business.
