Sales Figures Alone Do Not Show Everything
The other day, a client who had previously been searching for additional business auto financing called me to talk about his / her prospects. His situation hadn’t always been the greatest, but his / her current credit scores are getting close to excellent. The banks he had been to were just about turning him down, and he was searching for answers. After a few minutes of complaining about how he was being scrutinized regarding past indiscretions regarding his credit and his lack of “juice” with the institutions he had recently been dealing with, one comment turned out that I could not ignore.
He or she stated that his sales have already been approaching last year’s totals even with the particular seasonality of his enterprise (he’s in the event planning industry) and the dry period planning to end. That is where his or her biggest mistake was and the most likely reasoning behind each rejection he received.
Usually, people think of product sales as a business’s most significant measure of achievement. Of course, this theory isn’t without advantages, as the sales figure frequently represents the total amount of income flowing into a company, a minimum of from the standpoint of the regular day-to-day operations. There are also a few other figures that can make their way into the equation, such as advertising earnings and commission income becoming two of the more common. However, anything other than income through the direct purpose of the business is considered “below the line” earnings in the financial world. It is never generally included in the same way.
The biggest reason (other than the fact that it is not why a firm is in business) is that these secondary forms of revenue are not predictable or even manageable. Additionally, most people only consider revenues, which is misleading mainly because it does not take returns/refunds under consideration. So, getting back to typically the sales figure representing good results is just plain wrong!
It doesn’t matter whether you prefer gross or net sales, considering both numbers ignore sales price. The cost of sales is usually the total amount of money spent to have the product into the consumers’ arms. The methods of calculating this kind of number vary since several companies take all variables (cost of labor, unit hours, advertising). Still, for simplicity’s sake, I will use just two expenses: purchases and freight. Both of these figures are prominent, or in other words, these are the direct expenses involved in getting the final item to market.
You absolutely must pay for the components and the opportunity to get the components to you to ensure that you assemble your product (unless you are working with a provider willing to soak up the freight costs). These types of figures reduce the original product sales amount and give you your own company’s gross profit or even margin, which can then always be calculated into your gross earnings (margin) percentage by splitting up this gross profit by typically the gross sales amount.
The yucky profit (margin) percentage will say how much profit the company made from each dollar of income, considering sales and the price of goods. This is a find that is more telling of any company’s positioning than simply investigating sales alone since it considers not only the sales but the costs of those sales when you compare performance over time or to others in the same industry. When it comes to the client that failed to save financing, his gross revenue percentage was relatively the same year-over-year, so that was not the actual reasoning behind the rejects. In actuality, this was a good indication since, in a steadily decreasing economy, he was able to sustain a relatively level profit percent when many businesses tend to notice their drop due to the reduced demand combined with either regular or increasing costs.
This leads to the subsequent omission from the picture, which is operating costs. Running costs are the various other regularly occurring costs arising from normal organization operations. These include salaries, housing costs, insurance, automobile, advertising and campaign, office supplies/equipment, licensing, cell phone, electric/gas, etc. These charges are essential to consider when gauging the success of an organization because they are necessary for the typical operations of any distinct business. These operating charges reduce the previously discussed significant profit to give you the business’s working profit.
This represents the quantity of profit the company makes in a period after all of the required expenses, and costs of products are considered. This, too, can be utilized in calculating a critical proportion called the net profit border, which reveals the amount of benefit from each dollar of product sales, taking into consideration sales, cost of product sales, and operating expenses, that is an even more telling sign of the company’s success because the majority of the expenses are included. This particular is where this client made his major mistake.
While it is true in his sales and yucky profit were in line with the past year, his operating bills were out of control. The book on his warehouse space enhanced 10%, and his electricity charges also increased due to an across-the-board increase by the tool company. Also, he had widened his advertising campaign to virtually five times the amount of the previous season. He was falling behind with credit card payments and paying out significant amounts of interest.
This is important to comprehend because the banks look to observe that there is enough profit remaining after all of the regular as well as necessary expenses are protected to ensure that, in the case of a business recession or some other unforeseen event, the company can maintain its present payments as well as handle typically the loan repayments.
And then there is indeed what is the other income/expenses, and that is considered to be “below the line” since neither is a portion of the normal cycle of organization and includes interest income (unless it is derived from the company’s principal business purpose), insurance debt settlements, lawsuit payment/payouts, one-time or maybe extraordinary charges, medical bills that are not covered by an employee positive aspects plan, among a host of some others. These are generally not regarded as intensely due to their infrequent nature; nonetheless, they are expenses that usually alter the company’s bottom line.
You see that many elements go into running a business; it is, therefore, not as simple as considering the gross sales figures to have an accurate view of how a corporation is performing. Of course, this has been all simplified for the sake of making it a point. Still, the point wasn’t to supply an in-depth lecture but to show how oversimplifying stuff can hide potential complications within a company.
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