For a small business, growth and sustainability are both the two most difficult metrics to keep track of as well as the metrics that determine how healthy a business is generally. Harvard Business Review notes that in any growing business, the stages of growth remain the same, regardless of the size of the business. Achieving profitable growth requires understanding the business’ inner working and relating them to measurable metrics that can then be compared against one another over the course of a time period. One of the best metrics to track comes from the accounting process. Yet according to Intuit, more than 40% of small business owners don’t really understand finance nor do they understand the role of accounting in determining profitability. This lack of financial acumen can lead to disastrous results over time, especially in a small business where margins are small and miscalculation could bring about the collapse of the business. So how does a company achieve profitable growth over time consistently?
Things are not Always what they Seem
Most companies operate under the premise that the bottom-line statement at the end of a quarter or a year is enough to determine the profitability of a business. it seems obvious – the profitability of a company (and thus its growth) is tied to the profit that the company generates over the period in question. However, the use of the bottom-line as a metric for measuring the success of a business may be misleading. It might be more prudent to look at individual line-item profits in order to determine the profitability of these items throughout the stage of measurement. This can help a company determine where their most profitable items are, and which items are least profitable and could be cut from the shelf. This means a healthier bottom-line as well as a more streamlines item lineup for potential customers.
Don’t Mistake Revenues for Profits
Revenue, as defined by Investopedia, relates to the total income that a business manages to obtain during a specific operating period, and may be considered the gross figure that the business earns. Profits, on the other hand, are what’s left over after expenses have been managed and creditors have been paid. Sales contribute to the revenue value, but sales alone aren’t enough to drive growth, it’s simply a contributor to the company’s development. That’s why sales numbers by themselves can tell of false growth. It’s not unheard of that a company increases the number of sales they make over a period yet still suffer a loss at the end of that period. It may be that production or maintenance costs rise, particularly true for heavy goods such as wheelchairs, or operating expenses overtake the income from sales. A successful business aims to increase its consumer base over time in order to deal with potential changes in operating or production expenses.
Profit Margins are Where the Facts are Hiding
Shopify does a good job of defining profit margin as a percentage-based value that demonstrates how profitable a particular good or service is, with a higher number being relatable to a more profitable product. In order to work out profit margins within a business, it’s important to look at each line-item and evaluate their profitability individually. This also allows a business to streamline how they spend their money and attempt to maximize their profits by offering more profitable goods and services while removing those that are less profitable or end up as a drain on resources.
The Ultimate Responsibility Lies with the Owner
While financial software can be helpful in getting the initial values for profitability down as well as tracking performance across a time period, the final decision of what products are profitable enough and which ones aren’t, rest with the business owner. Financial management software can only work with the figures provided and if those are wrong, then the predictions for the business that the software generates will also be wrong. Hiring a bookkeeper or accountant might be a better idea, especially if they are skilled in offering solutions for small businesses. While tracking growth metrics at the start might be easy, as the business grows, it can get out of hand relatively quickly. Having a trustworthy accountant that can provide services for the business and is familiar with its operation is a priceless commodity and one which small business owners should look into acquiring before the business’ accounts get too huge to handle.