Companies are dynamic organizations with a myriad of business functions occurring simultaneously. In order for a company to grow, business functions must operate synergistically to produce an output that is in excess of the input. For example, sales must be higher than the cost to produce. The difference between the selling price and the price to produce must be higher than the company’s overhead.
When the financial relationships are aligned properly, a business will grow. If the financial relationships become inverted, financial problems will surface. There are several mathematical calculations known as Performance Measurements that monitor these relationships. Profitability is one of the most important Performance Measurements a company can monitor.
Most managers measure sales volumes as they understand the importance of monitoring income from customers. Some managers take it a step further and subtract the cost to produce from the sales numbers believing they are accurately measuring profitability. Neither is correct; simply measuring sales volumes or cost to produce will not indicate if the company is profitable. In both cases the company’s overhead (cost to operate such as rent, marketing, admin and executive salaries) is being ignored and therefore business owners are only seeing part of the picture.
The Bottom Line
A company is operating profitably if it is selling its products/services at a price that covers the cost of production and overhead expenses with enough money remaining for reinvestment. Therefore, the best approach is to monitor profitability at specific business cycles (1) after a product or service is sold and produced (2) after the costs to operate the business are subtracted.
Performance Measurements range from simple mathematical equations involving two or more numbers to more complex trend analysis utilizing numerous data points over extended time periods. Performance Measurements provide business owners with financial tools to monitor business performance, allowing management to proactively address issues before they become a crisis.
To learn more about Performance Measurements visit www.BusinessSimplyPut.com and look for the eBook titled, “Simple Math Calculations to Monitor Company Performance”.
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Lori educates and inspires entrepreneurs. Her company Business Simply Put provides information, advice and tools to succeed in business. Whether you are starting a company or growing an existing business, these tools will define your pathway to success. For more information visit www.BusinessSimplyPut.com or send an email to [email protected]. She loves to hear from inspired entrepreneurs!
