In the world of business, your bottom line is not always about your sales volume. Sure, as the accounting formula goes, sales less expenses equals profit, so it should be simple, increase sales, and profits increase. It unfortunately isn’t always just that easy, and can be much more about controlling costs. Lower costs also equal higher profits! Here are 4 steps to increase your profit without any change in the amount of sales you make.
1. Have access to real time financial statements
This first step is most crucial, as without real-time financial statements, you cannot complete any of the other steps. With cloud accounting software that links to your business bank accounts, being able to obtain real-time data is now a breeze.
2. Analyze your costs
Once you have an up to date profit and loss statement, you can analyze your costs. One great way to do this is to obtain a statement that expresses your expenses as a percentage of income, known in the accounting world as a common size income statement. This way, rather than just seeing a jumble of numbers that don’t mean much to you, you can see, “Wow, I am spending 10% of my revenue on advertising – is it paying off?” Without this analysis, it’s difficult to identify areas where you may be overspending.
3. Benchmark against your industry
Similar to analyzing your costs, analyzing your financial statements can enable you to benchmark your business against your competitors. Industry data is widely available, and using common financial ratios, you can easily see how you stack up against your industry. If you operate a restaurant and your average gross margin is 40%, but the industry standard is 25%, then that is an indicator that you have some room for improvement.
4. Make a budget
Using the findings from cost analysis and benchmarking, you can then formulate a budget. Figure out what percentages are indicators of a healthy business in your industry, and strive toward that. Then regularly compare your actual results to your budget and see how you are doing, and continue to look for areas of improvement.
The process of financial analysis and budgeting can be tedious, but it will pay off immensely. Is this something you would like to do, but don’t feel you have the knowledge to implement it on your own? This is one of our areas of expertise at Justine E Laurie CPA PC, and we would be happy to help. Need up to date accounting records first? No problem, we can do that too! Just fill out this form to get started.