Seven key Financial Indicators on the Profit and Loss Statement

7 Key Financial Indicators on the Profit and Loss Statement

The importance of specific financial indicators can vary depending on the industry, business model, and goals of the company. Regularly tracking these metrics and using them to make informed decisions can help a small business stay financially healthy, identify areas for improvement, and make necessary adjustments as needed.

The following metrics are important, but one must remember that they are absolute values. This means that making comparisons even one month to the next can be tricky. An example would be in Operating Expenses where one month has incidental (once off) expenses, making ‘like for like’ comparisons challenging.

1. Revenue: Total income generated from sales of products or services.
2. Cost of Goods Sold: The direct costs incurred in producing goods or services, including materials, labour and manufacturing overhead.
3. Gross Profit: Calculated by subtracting COGS from Revenue. It indicates the profit generated before deducting operating expenses.
4. Operating Expenses: All non-production costs necessary to run the business, including items such as salaries, rent, utilities, marketing expenses and others.
5. Operating Income (or Profit): Calculated by subtracting operating expenses from gross profit. It reflects the profit generated from core business operations.
6. Net Profit: Calculated by subtracting total expenses (including interest and taxes), from revenue. This is the final profit figure that the business retains.
7. Earnings Before Interest and Tax (EBIT): this is also known as operating profit, it represents the profit generated from operations before considering interest and tax.

Six ‘need to know’ Financial Ratios on the Profit and Loss Statement

A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken (in this instance) from an enterprise’s financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a business.

Ratios allow for an easy comparison of financial performance across different months, years, and even across businesses and industries. Effectively they provide a standardised way to assess financial data, making it easier to interpret the data.

Because you are taking the relative magnitude of two numerical values is also give a more holistic understanding of performance beyond just looking at individual line items.

1. Revenue Growth Rate: This shows the percentage increase or decrease in revenue over a specific period, often compared month to month, or year over year. It reflects the business’s ability to expand its customer base and market share.
2. Cost of Sales Margin: Calculated by dividing cost of sales by revenue and multiplying by 100. This percentage shows how efficiently a business is manging its production costs in relation to its revenue. A lower cost of sales percentage indicates that the business is able to generate revenue while controlling its product costs effectively.
3. Gross Profit Margin: Calculated by dividing gross profit by Revenue and multiplying by 100. It represents the percentage of revenue that remains after covering the cost of producing goods or services. This also helps to assess the efficiency of production and pricing. This percentage helps assess the profitability of a business’s products or services in relation to their production costs. A higher gross profit percentage suggests that the business is generating a healthy profit margin from its core business operations.
4. Operating Expenses Ratio: This ratio compares total operating expenses (salaries, rent, utilities, etc.) to revenue. It highlights how efficiently the business is managing its costs.
5. Operating Margin: Calculated by dividing operating income by revenue and multiplying by 100. It represents the percentage of revenue that remains after deducting operating expenses.
6. Net Profit Margin: calculated by dividing net income by revenue and multiplying by 100. It indicates the percentage of revenue that becomes net profit. It gives an overall picture of profitability.

Is it not your skill set?

Financial Management is often not a strong skill set for many Business Owners, and if this is the case for you, then follow the advice of Andrew Carnegie who famously suggested that his epitaph should read, “Here lies a man who was able to surround himself with men far cleverer than himself.” And that’s exactly what he did: Carnegie surrounded himself with an excellent team that helped him build and sell U.S. Carnegie Steel to JP Morgan’s U.S. Steel for a staggering $400 million in 1901.

The success formula lies in being able to recognise your own limitations as an entrepreneur and being able to tap into the skills and knowledge of those around you for the required complimentary knowledge, skills and expertise.

Andrew Carnegie knew he could not “do it alone”.

A few options to consider:

1. You could start with some financial training, and this could be accessed online, you could attend a training course, or you can find someone to assist with some personalised one on one training.
2. If your business cannot support or justify the cost of a Financial Manager, then look to filling this gap in the skill set through a ‘freelance’ or ‘paid per hour’ type of service.
3. Find a mentor to guide you through your financials each month. The focus needs to be on what are the numbers telling you, and not on what are the numbers.
4. If you are a sole owner, or even a business with two or more owners, but in a leadership team where no one has the financial skills, then find a person with the financial skills to act as your sounding board.
5. Establish a Monthly Management Meeting and get an independent party with the financial skills to join the meeting and help review the financials.
6. Hire a Business Coach or Business Consultant to help you set up your Financial Performance Management System. Your coach or consultant should be able to teach, guide and help you to build your financial knowledge and skills.

At 40 Megahertz Consulting we will be able to assist you to determine which approach would be best for you, and then assist you with a service that matches your requirements. Click here to chat to us today!