Know your numbers well to rake in profit

Published on Wednesday, Aug 27, 2008

A joke I heard when I was a kid goes, “How can you immediately double your money? Fold it in half and put it back in your pocket!” If only making money was that easy.

Well, everyone from a business owner and CEO to company director dreams of hitting the bull’s eye and finishing the year in profit. But be it a winner of a business idea, a start-up venture or a profitable enterprise, uncertainty clouds the hori zon and things can go awry.

While there are no guarantees and no crystal ball can predict your success, there definitely are steps you can take to keep your operation pointed in the right direction – towards profits.

Is your profit what it should be?

Everyone is in business to make good money, much more than just paying the bills. This calls for proper planning and a complete business plan, not just educated guesses for hitting the targets. It is true that the overwhelming whirl of details and unrelenting pressure on the bottom line can drive you quite crazy.

An uphill climb awaits, you have to follow a disciplined approach without ever losing sight of the ultimate goal, to earn profits.

Be well informed – Every executive or manager should think and act like a business owner. Know your business’ worth and health in and out. Understand how it’s doing and what are the weaknesses that can be improved or corrected. Something as simple as an intelligent day-to-day observation can help you to provide value.

Crunch the numbers – There is no dearth of financial statements and projections that can serve as effective screening tools. Study figures like:

• Costs: Identify fixed and variable expenses and thoroughly check the budget allocations for each. This will unearth costs excesses and help you to control the same.

• Sales records: Apart from cost-consciousness, study projected sales volumes vis-À-vis actual sales patterns.

• Product price: Gain adequate information on your pricing strategy to determine whether you are charging less or more than the worth of the product or service. Analyse the cost per unit and adjust the final mark-up to absorb rising/anticipated expenses while keeping the price on a competitive level.

• Inventory: Generate a proper system of inventory as excessive stocking of raw materials or finished products can needlessly tie up your resources. Again, shortages of the same can negatively impact the bottom line.

• Profit and loss statement: Scrupulously evaluate this important statement to get a handle on each and every revenue and cost area. Study everything from the profit and loss for each of your products and product lines to the profit and loss for your entire operation.

• Break-even analysis: This is another financial tool, which will enable you to decipher the exact point beyond which the business starts to yield profits.

Therefore, look at all possible financial ratios and meaningful forecasts to gain a clear understanding of the business. Sound knowledge coupled with perseverance alone can help you to attain and surpass the targets.

The big picture – Do not restrict yourself to a single month’s sales or profit margin by itself. Put them in the right frame by say, graphing the operating statements, to note significant trends of what has happened and is likely to happen. As a consultant stresses on regular strategic planning with, “Your record of sales, your experience with the markets in which you sell and your general knowledge of the economy should enable you to forecast a sales figure for the next year.” Carefully analysing trends can help you to grasp opportunities as they rise and avoid crisis before they spiral out of control.

Call the shots – Draw on a balanced judgment to make timely decisions and transmit them into effective action accordingly.

Different business circumstances call for an informed tinkering like reducing the number of employees, looking for less expensive sources of manpower, discovering new customers, finding cheaper raw materials or using technology to its full capacity. Success calls for fast and flexible new practices, but only after determining all possible consequences of any course of action.

Control business activities – You have to control the activities of the company, not be controlled by them. It’s your job to overcome bottlenecks and garner a positive culture that motivates people and gets results. Effective HR management calls for designing well-structured jobs, periodically reviewing and aligning them, generating accountability at all levels, providing adequate compensation for quality work and controlling both absenteeism and turnover. Give enough attention to important tasks, but ensure that the business does not depend on you totally either.

In this struggle for professional management, you can also call on experienced entrepreneurs or consultants for expert guidance.

Yet, if your business is still not yielding the kind of profits you expected, do not be disheartened or lose hope. The pace of business demands persistent efforts and planning to be able to maximise the profit potential.

PAYAL CHANANIA