Following my recent blogs let’s assume you have taken all of my advice. You have implemented Xero, you have access to your data in real time, and you have saved a few hours per month by implementing best practice………now how do you use it to your advantage? What key figures and statistics should you be tracking regularly and how should you use these?
Here are 5 key profit and loss figures I believe you should be looking at every month.
It goes without saying that the level of sales you are achieving each month is very important to your business. If you actually track this figure each month and year it will help identify patterns. Compare the same months in different years. Analyse any months that perform particularly well to see how you can replicate that, analyse those performing particularly poorly to see how it can be improved.
Gross profit margin (gross profit as % of sales):
This is a vital statistic on how your business is doing. Track this figure month by month and investigate any anomalies. This will focus your mind on maximising this – 1% gained here can mean £000’s added to your bottom line – that’s in your pocket.
Breakeven (sales you need to achieve to cover your fixed costs):
It is typical for business owners to be quite shocked and even scared when they do this exercise, as their business has grown they have not quite realised how many costs they have committed to. But being fore-warned is fore-armed and it will focus your business development and sales team on achieving the level of sales you need. It will also help you to manage your cash flow so you could cover the business costs for say 3 months if something major happened.
Labour as % of sales:
A key indicator in most business’s is the level of wages or sub contracted staff as a % of sales, tracking this over time will allow you to identify any problems in this area very quickly and easily. A sharp increase could be a result of many factors, but the main objective is that you identify this very quickly and investigate the issue and rectify if necessary so it does not have a big impact on your business performance for the year.
Net profit % (net profit as % of sales):
This is your operating profit after taking account of all administration costs and overheads. It could be argued that this is the most important figure in your profit and loss account as it is ultimately what you have left after all expenses have been accounted for. By tracking as a % you can easily see whether any increases in turnover have flowed through to your bottom line or whether you have lost the additional income you have won in additional costs.
Tracking these items so you can act on them very quickly is made easier than ever with the implementation of Xero. The customisable reports are easy to use and the information available to you is up to date.