What are your 2013 New Year's resolutions for your business? To make more money? To grow and expand? To keep trying to pull yourself out of the doldrums of the recession? I have some resolutions here for you that aren't the typical, "I want to make more profit," New Year's resolutions. Everyone wants to make more profit. Here are some resolutions about ways to make more profit. Some things you can do that maybe not every business owner will think of that may actually work to improve your profit. Read on and try out these tips!
Almost every business firm wants to grow. If you want your firm to grow and grow in a responsible manner, try to reach your sustainable growth rate. The sustainable growth rate is the maximum rate you can grow without raising more debt financing. Given your asset base, profitability, dividend payout, and debt ratios, the sustainable growth rate is the most you can responsibly grow.
Think of your sustainable growth rate as the ceiling for your sales growth. The breakeven point is the "floor" for the amount of sales you must make in order to stay in business. The sustainable growth rate is the maximum amount of sales you can make in order to not require any more debt financing. Having this information gives you an edge in business.
The operating profit margin is a valuable financial metric to the business owner. It gives the business owner important information that you cannot get from the net profit margin (net income). Most business owners just look at net income. They might go a step further and look at look at the net profit margin which tells them how much of each dollar of sells they keep as net income after paying all expenses.
The true secret of running a successful company is to analyze the operating profit margin. Why? Because it tells you about how well you are controlling your costs. Before reaching operating profit margin, also called earnings before interest and taxes or EBIT, you subtract out all of your cost of goods sold, selling and administrative expenses, and depreciation. Overhead is a big part of cost of goods sold. Reducing your overhead will help control your total costs. If you have a high operating profit margin after subtracting out all of these costs, then you are practicing good cost control at your firm. If your operating profit margin is low, the opposite is true. Be a successful business owner by utilizing a financial tool not many think about - the operating profit margin!
Business risk is the risk inherent in your company's operations. Business risk arises from the uncertainty in the economy. This uncertainty leads to uncertainty about future sales and profits and any future capital you may need. If there is economic uncertainty, that leads to uncertainty about interest rates and sources of capital or financing for your company. This is the part of business risk you can do very little about.
If your company is a manufacturing company or any kind of company with a lot of fixed costs, then you have high business risk. Remember that you have to pay for those fixed costs (overhead) no matter what. Even if your income drops during an economic downturn, you still have to pay your rent, utilities, and other fixed costs. The trick is to know how to lower those fixed costs when and if you need to.
Do an assessment of your business risk using these four ratios. These ratios will tell you where you are on the business risk "spectrum." If your business risk is high, take a look at what is causing it to be high - most probably your overhead. See if you can find ways to reduce your overhead so when an economic downturn happens, you will be prepared!
Most business owners know how to find the breakeven point for their business firms. That may be as much as they know about costo-volume-profit analysis for their business firm.