For many business owners, growing their business is a priority. But what business owners often might not consider is that not all growth is created equal. As you grow your business, you need to monitor specific key performance indicators to ensure your business grows and is profitable.
A great way to monitor whether your business is profitable is to monitor your profit margins.
Your profit margin is the percentage of revenue your company retains as profit after taking into account all costs and expenses. Calculate your net income (income minus all expenses) and divide it by your gross income. For example, if your company’s sales last year were $100,000 and total expenses were $85,000, then your company’s net income was $15,000 and the profit margin was 15%.
Profit margins vary by industry, so it is imperative to compare your business to other companies in your industry. You want your company’s profit margins to be at or above average.
Grow your business around profit
A business financial plan is a useful tool for developing a growth strategy. A business plan is a 12-month operating forecast that breaks down monthly revenue growth and expenses and ensures that you either maintain or increase your profit margins.
When profit margins drop, you need to work harder to make a profit. Conversely, when profit margins increase, the extra earnings can be reinvested in the company. Regularly monitoring your company’s profit margins will help ensure your business grows profitably.
Ways to ensure you grow your business profitably:
1. Create an operational forecast
It’s critical to have a realistic idea of your expenses and how much revenue you can expect to bring in. This is called creating an operational forecast. To do this, start by estimating your costs for the next year, including rent, wages, inventory, and utilities. Then, evaluate your expected earnings for the year. This can be done by looking at sales from previous years or by conducting market research. Once you have these two numbers, you can start creating your operational forecast.
Remember to keep your forecast realistic and update it regularly as your business grows and changes. Doing this will ensure that you always have a clear picture of your financial situation.
2. Monitor your progress monthly
At the beginning of each month, review your sales forecast and compare it to your actual sales. This will help you understand how accurate your forecasts are and whether any adjustments need to be made. It’s also a great way to monitor progress and identify trends.
For example, if you find that you are consistently falling below forecast sales for a particular product, you can adjust your forecast accordingly. If you notice that summer months tend to have higher sales, you can factor this into your forecast for the rest of the year.
By monitoring your progress against your monthly forecasts, you can ensure that your business is on track to achieve its goals.
Grow your business around profit
3. Investigate any discrepancies
It is crucial to keep a close eye on your financial situation. One way is to survey the difference from your forecast monthly. This means taking a closer look at why your results differ from your predictions. Are you spending more than you expected in certain areas? Is the number of customers lower than expected?
By investigating the differences, you can better understand your financial situation and make adjustments accordingly. This will help ensure your business stays on track and remains profitable.
Most importantly, as you grow your business, keep an eye on key performance indicators like profit margins. Proper monitoring of these metrics will help you make profitable business growth decisions. As always, a sound financial plan can go a long way in helping you achieve your growth goals.