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How the Right Information Can Mean Increased Profits
| Guest post by: Steve Major |
Article Overview: Business can get increasingly more complex as it grows. Gain a better understanding of your business and how it makes money by making sure you have the right information at your fingertips. Just a few key decisions being made with reference to the right financial information can lead to an exponential difference in business performance.
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Free Download - MIND TRAP: Ignoring the Evidence By Steve Major |
How the Right Information Can Mean Increased Profits
Business as it grows gets increasingly more complex. The reason why business is successful inthe early days can be quite often attributed to the technical expertise of the owners and managers. While this is essential, management's lack of a formal analysis and decision-making process couldbe limiting further growth and profit. Typically the difference between a good business and a greatbusiness is the quality of decisions made. It is just a few key decisions being made with referenceto the right financial information that can lead to an exponential difference in the business performance.
In the recent past businesses have faced a tougher economic climate. Many businesses have experienceddifficult cashflow conditions. This has lead to some decisions needing to be made. Below I illustrate thisand how better information can lead to better decisions.
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Current Situation
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Total
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5% Price Cut
20% Volume Increase |
Total
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5% Price Rise 20% Volume Decrease
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Total
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Sales
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100,000 @ $10 each
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$1,000,000
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120,000 units @ $9.50 each
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$1,140,000
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80,000 units @ $10.50 unit
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$840,000
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Cost of Goods
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$9 per unit
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$900,000
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$9 per unit
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$1,080,000
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$9 per unit
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$720,000
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Gross Profit
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$1 per unit
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$100,000
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$0.50 per unit
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$60,000
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$1.50 per unit
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$120,000
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Change in GP
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($40,000)
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$20,000
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Additional volume required to make up shortfall
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50,000 units @ $0.50 GP
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$40,000
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Management is convinced that a drop in price will increase sales volume by 20%, thus improving grossprofit and cash flow. In fact a 5% price cut will require a 100% increase in sales volume just to keep thecash flow at the same level before prices were cut.
Even if business was able to achieve this increase insales, cash flow will not change and they'll have to work harder to achieve it.
To improve growth profit by $50,000 it will require sales to increase by 200%.
If the owners and managers of the business had better information at their fingertips, then they may haveconsidered other strategies to achieve the result of increased cash flow. For example a 5% price rise, whichcould result in a 20% loss in sales volume, would solve their cash flow problem and in fact would haveimproved their growth profit situation by $20,000.
The information necessary to make the best decision is not found in the financial statements. Financialstatements can only be used as a basis for the start of true analysis. Financial statements are full of historicalinformation and do not have the information that will predict the future value of the business. We need to getbehind the numbers in the profit & loss statement and balance sheet.
As the example illustrates, the information to make a better decision is not detailed or complex. It is abouthaving an understanding of how the business makes money. Armed with this the business owners would beable to make a more profitable decision.
Get behind the numbers on the profit and loss statement. Get a true understanding of how your business makesmoney.
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Article Tags: business performance, financial information, increased profits, key decisions, profits, right information
Referred by: http://www.dglong.com
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About the Author: Steve Major RSS for Steve's articles - Visit Steve's website Click here to visit Steve's website   Lead versus Lag Future versus Past MIND TRAP Ignoring the Evidence MIND TRAP Perspective Moral Hazards of Metrics MIND TRAP Following Fads and Fashion |
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