The Importance of Knowing your Business Numbers
The knowledge of your business’s numbers is crucial for any business to achieve its business goals and make informed financial decisions. This allows you to plan, control, and manage your sales, cost, overheads, and profit. Otherwise, you will be in the darkness.
What are your business numbers, and how do you find them?
The basic business numbers are:
1.-REVENUE – “Sales”
It is the income that you receive from sales, services, or products that your company offers to its clients.
2.-CONSTRUCTION COST- “Expenses that easy to allocate for a specific project”
Costs mean every expense that you spend to produce a product or service. The cost of producing or manufacturing a good or service is variable because it is created only if you are going to produce the product or service.
When applying to the construction industry, you know that you will need to run a project. This project will include material, labor, subcontractors, rental equipment, and other costs such as permits, portable toilets, and dumpsters.
You will also need to allocate part of your payroll taxes, workers comp, and bonds for that specific project.
In the construction business, the key is to recognize the construction costs.
3.-GROSS PROFIT- “The difference between revenues and constructions costs”
The gross profit is especially important because it is going to tell you how much you have left to cover your company’s overheads and profit. If your gross profit is not enough to cover overheads, you will have a loss. Which ultimately means no profit.
4.-GROSS PROFIT MARGIN- “Gross profit expressed as a percentage”
This is when you compare your company’s gross profit with your company’s revenue.
For Example:
Revenue………………….…$150,000.00
Construction Cost ……. ($112,500.00)
Gross Profit………………. $37,500.00
Gross Profit Margin: $37,500/$150,000 = 25.00%
That means that for every $1.00 that your company sells, you have $0.25 cent left to cover overheads and profit.
5.-OVERHEADS- “Expenses to run the business, not to allocate for a specific project”
Overheads are expenses that your company spends to maintain your business running regardless of how much or how little your company is selling. Most of these expenses are fixed.
Example of overheads is, Office space rent, warehouse rent, utilities, office personnel’s wages, officer’s wages, payroll taxes, office supplies, bookkeeping services, truck maintenance or repairs, marketing, and advertising, dues and subscriptions, gas, toll, and parking, travel expenses, insurance, and taxes…etc.
They are expenses-not costs because they are not directly related to a specific project.
For example:
Overheads increase when you hire a new-employee or rent a bigger office, a warehouse, run a marketing campaign, implement a new software… etc. These kinds of decisions must be justified by meeting increment sales goals.
On the other hand, these expenses could decrease if you implement a better operating system or organize your business process better because your company becomes more efficient and effective in avoiding repetitive processes or functions.
6.-NET PROFIT- “The difference between gross profit and overheads”
This is how much is left after deducting your overhead from your gross profit.
For Example:
Revenue………….……. $150,000.00
Construction Cost…. ($112,500.00)
Gross Profit……………. $37,500.00
Overheads………………$30,000.00
Net Profit………………. $ 7,500.00
7.-NET PROFIT MARGIN – “Net Profit expressed as a percentage”
This is when you compare your company’s Net Profit with your company’s revenue.
Follow the previous example:
Net Profit margin: $7,500/$150,000 = 5%
That means that for every $1.00 that your company sells, your company makes $0.05 cents as a profit.
WHERE DO YOU FIND THESE NUMBERS?
All of your business numbers are found on the Profit and Loss Statement and Common size Income Statement which each line item is expressed as a percentage of the value of revenue or sales.
WHAT YOU CAN DO IF YOU KNOW YOUR BUSINESS NUMBERS?
Knowing your business numbers allow you to make decisions such as:
• Monitoring your Construction Costs
• Monitoring your Overheads
• Decrease or maintain your Construction Cost and/or Overheads
• Planning your Net Profit
Additionally, you can find if your business numbers are aligning with the media industry sector that you work in.
For example:
Based on the industrial sector the median of Gross Profit Margins for:
Single-Family Residential is…………24%
Commercial is…………………………….16%
Heavy and Highway is………………….24%
Special Trade is……………………………30%
Based on Financial Statements for over 125,000 companies for the years 1966-2005/Dun & Bradstreet, Inc
Just imagine that you are in the Special Trade sector, which its gross profit median is 30%, and your company gross profit margin is 25%. That means that you need to increase your gross profit margin close to 30%. Increasing your gross profit margin will be accomplished by reducing your construction costs or increasing your markup (profit and overheads), exercising better control of your construction cost, and prices.
Knowing your business numbers is extremely important because these numbers not only show your company’s performance but also tells shareholders and exterior financial institutions how capable you are in managing and generating a profitable business.
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