New business owners may be great in a particular field but they might lack the skill to monitor their overall financial health of the business. It can be hard to know what to track because there are many reports to run and numbers to check. These financial skills are very important to know whether your company is on the right path of prophet and making an impact.
Below mentioned are a few ways from which you can tell whether your company is profitable and making an impact:
- Check profit per client:
Profit depends upon clients. Points may be more profitable than others and it is very important for a business owner to know which clients are contributing most to the profit.
Surprisingly, many times a client who pays big fees is not the most profitable. Even if you are charging these clients more, also be increasing your expenses. Sometimes it is more profitable to have smaller clients because the revenue to expense ratio is better.
You can use accounting softwares to measure profit per client but you should not always rely on it.
- Calculate gross profit margin:
You are doing business of physical products then gross profit is an important indicator of profitability level. Tells you how profitable a particular product is.
Gross profit equals to the difference of sales revenue and cost of goods sold. Materials, overhead cost and Labour includes in cost of goods sold.
Gross profit margin tells you the percentage of profit you are keeping compared to how much your product is costing. It is the ratio of gross profit and sales revenue.
A higher value is not a problem as long as your sales volume is high enough to pay your expenses. Have to make sure that gross profit margin is not decreasing. It is happening then it’s time to raise your prices or find ways to cut product costs.
- List upcoming prospects:
Evenly supply of profits should be done over the year in order to help with the cash flow. However, it is very rare. A project can take up business owner’s screen and then there is little work over the summer. This is partly because the owner is so focused on the project that he forgets to line up new prospects.
You should keep a list of potential new projects somewhere you can easily see. It is necessary to do some marketing to attract new businesses if the list is short. Profitable business is always growing, not stagnant.
- Analysing your operating expenses:
You have to keep your eye on your expenses and they should always be less than your revenue. Sometimes business owners, as the business grows, invest the increase revenue back in the company without even checking if their expenses are outpacing revenue.
Turn to your profit and loss statements and look at the line “total expenses”. you should look at expenses month by month and compare it to revenue month by month to find a trend.
Some higher expenses are unavoidable like hiring a new employee to the payroll for buying a new equipment. It mostly depends on your industry.