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Do you feel like you really understand your financials?
Hi, this is Judi Otton with GrowthCast and if you answered no to that question, you’re really not alone.
Today I’m going to give you one tip to increase your insight into your financial performance.
When you run your profit and loss statement out of your accounting system, run it for multiple months or multiple years with a column for each period and download it into an into Excel. Then under the gross profit line and under the net income line, I want you to enter two more lines for gross profit margin and net profit margin. Now gross profit margin is calculated as gross profit over total revenue and net profit margin is net income over total revenue. And I want you to look at the changes over time. If it changes more than one or two percentage points, see if you can figure out why.
Some reasons why your gross profit might change over time is if you sold more of one product or service that may be more profitable or less profitable, that will change it. If you offered a lot of discounts during a period that will obviously reduce your profit margins. For net profit margins, this may change if you had a large expense in that period. So maybe you paid your full insurance bill or, if you’re a company with large payroll, if you have a three payroll or five payroll month, that will change it. But there may be other things going on. So look and see if you can tell or if you found ways to cut expenses that will obviously increase your net profit margins.
The third thing I want you to do with this is get online and look up what are benchmark profit margins for your industry. So just type profit margin for an architect or a lawyer or marketing agency. You get lots of information on benchmarks and that will tell you where you stand within your community.
If this was helpful, please consider checking out my Fiscal Fitness Bootcamp. We dive into things like this and so much more to get you really comfortable and really knowledgeable about your business’s financial performance. If you have any other questions, feel free to reach out and I’ll be back next week with a new Fiscal Fitness Tip of the Week.