Profit and Performance

Budgeting and Business Planning

All businesses must as a minimum, prepare and keep current, a Cash-Flow Budget, and if you are a growth business you must embrace this concept

These budgets assist you to see your business as a ‘living’ organism, and that is what a business organisation is. A budget allows you to complete sensitivity analysis to envisage the effects of out-side influences (e.g. “What happens if interest rate go up by 1%?”), to build-in a ‘margin-of-safety’ and to target a certain profit margin; all assist in your decision-making process.

Financial Performance Review Assessment

To understand something, you must measure it; this includes a business.

There are three (3) different types of Ratio Analysis (Profitability, Liquidity and Performance), an Analytical Review of the Financial Statements, Horizontal and Vertical Analysis etc that should be done each year to assist you to understand your business, especially if you want to grow. “If you fail to plan, you must be planning to fail.”

You must remember, especially if you are in small business, that your major stake-holder, your ‘partner’ in business (ie.your bank) uses, and keeps, many ratios on you and they can easily measure them against their data-base; as you are surely not the only business of your type on their books. You need to know what they know. 

Profit Analysis

The most important numbers on the financial statement, from a growth and sustainability viewpoint are the Gross Profit Margin, and the Net Profit Margin.

The GPM% tells you about your average mark-up on cost, and your cost of goods sold.

The NPM% tells you how you have performed; and this number may be compared across time, firm and industry: much the same as the GPM%. 

You should always be careful when comparing, that you compare like with like, as Profit may be termed Operational, Branch, Net, EBIT, EBITDA, and either before or after income tax, as they all tell a different story. 

Analysis of Costs, Volume, Pricing and Profit margins

This particular analysis will show you what is your break-even point for a particular cost-structure, and it will also show you if your pricing policy delivers a profit, and of what magnitude. 

One of the first questions a financier will ask of you about your business, to see if you understand it, is, “Do you know your break-even points for price and production?”

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