The sign of a healthy small businesses is year-over-year growth. Any slow-downs or steady declines in sales can be detrimental for your business. A loss in sales indicates a failure to plan for changes in the marketplace and poorly performing business operations.
Over time, even a good business plan needs to be analyzed and readjusted. Making the right decisions to adjust your plan rests upon your sales data. If you don’t have a centralized point of sale and accounting system, then you may need to pay an accountant to gather the numbers for you. For a retail business, the data on hundreds of SKUs and expenses can be easily captured through an all-in-one point of sale system. From it, simple reports can be made for the following quarterly reports that are essential to understanding the health of your company:
- Total revenue.
- Total costs of goods purchased.
- Average daily cash.
- Selling, General, and Administrative expenses (SG&A).
- Total sales by individual product and/or service.
Using the data from the reports allows you to analyze your company. The sections below are general terms used to describe the health of a business. Financial institutions, large and small, make decisions on purchasing or loaning money to businesses from these facts and figures. As a business owner, it’s important to take the time to learn them.
1. Gross Profit
Gross profit indicates the money on which your business runs. The formula for this is simple:
Total Revenue – Total Costs of Goods = Gross Profit
This can also be calculated as a percentage, called the margin. Any increase in profits by dollars or margin is a healthy sign your business is growing. Decreases for either can indicate slow sales and inflation of product costs.
2. Operating Profit
Earnings before interest and taxes (EBIT) describes the health of typical business operations.
Gross Profit – SG&A = Operating Profit (EBIT)
This can also be shown as a percentage and described as a margin. How efficient is your business? Your EBIT will tell you. Any decrease in EBIT indicates operations taking away from profits and should be addressed quickly.
3. What’s Selling and What’s Not
Some products sell quickly, while others sit on the shelves for longer periods of time. Understanding the shelf life and margins of your products provides valuable financial data about your product offering. Dead stock, a term describing products that haven’t sold, take up valuable shelf space and the opportunity for revenue generating products. More importantly, knowing what is selling and what’s not is a window into what your customers expect to find and purchase at your store.
4. Customer Experience
The reports above show the fiscal activity of your company, yet neglect the most important information—who are your customers? Robust business data is more than just sales numbers. It describes your customers and their experience with your store. Capturing information about your customers helps you understand:
- Returning customers versus new.
- Frequency of visits for returning customers (also an indication of loyalty).
- Geographical reach of your store.
- Customer engagement (loyalty programs and feedback).
There are fewer expenses related to repeat customers (higher profitability) and they are familiar with your operations, such as delivery or sales process. However, surviving on your existing customer base is not an option, especially if you want to grow your business. Have a good understanding of where your customers are from and how they are engaging with your business. Loyalty and reward programs are effective tools to capture interest and keep customers coming back.
Find an Expert
The daily operation of a small business owner often places a premium on any time spent away from their work. Make the investment and take the time to strategically plan for your business’ future. If you aren’t able to understand how to analyze your business and don’t have the time to educate yourself, then maybe it’s time to invest in outside resources. There are many people, such as accountants and business consultants, that can compile the data you need and help you understand the health of your business. The key here is to not let your strategic plan falter because of neglect. Staying engaged with the process and following sound business principles are what keep a business growing.