Your full-year data will highlight areas of potential ... and possible black holes
This article originally appeared in the March 2016 edition of INSTORE.
The last 12 months are now well behind you and if you are well organized you may even have some figures back from your CPA. It’s easy to just ignore the financial results you receive at the year’s end, but this is a good time to review your financial figures for last year; both within your financials and within your management reports to see how you are tracking.
Here are some key variables you need to check and monitor:
Markup achieved: Too many businesses give away too much profit by not having a high enough markup. What was your figure for last year? You can view this in two different places and it pays to do so as a form of audit of your business. First, look at your reports from your accountant. Your markup can be determined by dividing your total sales by the cost of the goods you sold during the year then multiplying the answer by 100 to give you a percentage. For example, if your sales were $500,000 and your cost of goods sold (sales less the gross profit you made) was $270,000, your markup would be $500,000/$270,000 x 100% = 85%.
At this point I like to compare this figure with the markup achieved in my POS management system reports. Do they compare? There may be some margin for variance but the results should be similar. If your POS reports show your markup as 105 percent, while your financial reports say 85 percent, then that’s quite a difference. There may be some leakage going on that needs to be investigated.
Net profit as a percentage of sales: Take the overall profit achieved and divide this by your total sales for the year. This is your net profit percentage. Most businesses will be between 8 percent and 20 percent depending on their circumstances. The best comparison is to look at this compared to your previous years. Work the ratio out for the last two financial years and see if it is increasing, decreasing or staying the same.
For example, if your net profit is $80,000 and your sales figure was $1.2 million then your profit percentage would be 6.66. This would be low but it would be interesting to compare. A low figure signifies either insufficient markup (check markup percentage achieved above) or too many costs for the business (e.g. wages or rent or another cost might be quite high relative to sales achieved).
Expenses: Review your top three expenses. They are most likely rent, advertising and wages. Check these out and your other higher expenses. What were your comparable costs last year? What percentage of your total costs are these? Can they be cut in any way?
Now is not a time to be passive with your financial data. Use the invaluable data you have to drive your business to a new level.