Gross Profit Margin Analysis Boosts Profit Explained

Gross Margin Analysis opens the door to understanding the complex interactions between Revenue, COGS (Cost of Goods Sold or Operating Expenses) and Gross Profit.  It can be hard to understand why (e.g.) Revenue is going up but Gross Profit is going down!  Gross Margin also lets you measure the operating efficiency of your business and points out which components of your COGS may be declining in efficiency.  Bottom line, an improving Gross Margin is a good sign for improving profitability in your business.  Yellow Belt

How the Profit Flywheel Accelerates Your Business

This is the 12Faces structured roadmap to growing your business. We use the flywheel to explain the structure of the material. It is one of many possible roadmaps to growth. Use it as a suggestion tool to incorporate into your business planning. Yellow Belt

How to Benefit from Cash Conversion Cycle (CCC)

How fast can you grow your business? This depends on how well you convert your sales into cash-in-hand. Is this conversion slow? You will need cash from other sources to fund your growth in sales volume and pay expenditures. Some expenditures will be for goods and services, others for capital items. The Cash Conversion Cycle assesses how you are going. It is an important metric for fast growing businesses. Blue Belt 

How to Use Gross Margin Analysis

Gross Margin Analysis:

  • Lets you diagnose problems caused by changes in Income and/or Variable Costs.
  • Income and Variable Costs can move in different directions, or in the same direction, at different speeds.
  • This can make it hard to work out what is causing an upturn or downturn in your business.

The analysis tips here will help make that clearer.  Yellow Belt

Overhead Margin Analysis Explained

Overhead Margin relates to Overhead Costs, which are the costs in your business that do not change directly with a change in your Revenue and/or a change in your Cost of Goods Sold (COGS).

They include such things as:

  • Rent, insurance.
  • Interest.
  • Salaries of permanent staff.
  • Administration costs in general; telephone, office costs.
  • Some elements of the sales process that are not directly related to your Sales Revenue.

These Overhead Costs tend to grow over time and may lead to inefficiencies in your business. This is due to activities no longer being relevant to your business but remain as a cost. 12Faces has several tools for helping to remove these “barnacles” that detract from your Operating Profit. Yellow Belt

Benefit from Labour Efficiency Ratio Metric

The cost of labour is one of the largest overhead expenses in most businesses.  Any inefficiency here is an expense that must be recovered from the potential Profit of the organisation.  Labour tends to grow of its own accord and it is very difficult for the business operator to know just how labour productivity is going as costs are rising.  The Labour Efficiency Ratio discussed in this article is an early warning alert if wages are moving in the wrong direction.    Read this if: You have have sufficient staff to find yourself losing track of their costs and contribution to company productivity / profitability or if you are looking at putting on staff, like accountants, that don’t directly contribute to profit generation. Probably more likely to appeal when you have 10 staff or more.    Relies on: mentions a metric dashboard to monitor your business. Audio/visual materials: none  Degree of Difficulty: Blue Belt (intermediate)

Learn about Daily Sales Outstanding Metric

Summary

cashflow is the life blood of a business but it is a difficult thing to grasp as an abstract idea.  “Is my cashflow OK?” is difficult to answer.  Effective management of Accounts Receivables is part of the answer.  The  Accounts Receivable Daily Sales Outstanding (DSO) ratio, and its partner, the Daily Accounts Payable Outstanding (DPO) ratio respectively measure how many days it takes to collect the money owed to you and the days it takes for you to pay your suppliers.  If DPO is more than DSO, you are paying suppliers slower than you are getting money from your customers and you are in a positive position.  It also means you can fund your growth (to at least some extent) from sales.  If the DSO is larger than the DPO, you are paying suppliers before you collect from your customers so you will need an overdraft and may actually run out of cash in the foreseeable future.  Also, you will not be internally generating sufficient money to pay for your growth and will need to find other cash sources for that.

These two ratios should be key metrics on your dashboard so that you can rapidly see if cashflow is becoming unhealthy.

Read this if: you are in business!  Seriously, understanding your cashflow is a basic necessity for a business.  These two ratios help explain your current position and trends.

Relies on:  the use of ‘Dashboards’ to monitor company-critical information.

Audio/visuals: none.

Degree of Difficultly: yellow belt (entry-level).

How to Protect the Wealth your Business Generates

Your business is likely to represent a big part of your personal wealth.  Learn how to protect the wealth your business generates. Getting your wealth together is a lifetime of work so the last thing you want to happen is to lose it because of some foolish decision or unexpected event.  Yellow Belt

How to Measure Net Cashflow

Cashflow is the lifeblood of any businessIf the speed you collect cash owing to you is slower than the rate you pay it out to your suppliers, you are going to find it increasingly difficult to find the money to pay your suppliers.  Unless this is rectified, you stand a good chance of going bust. Positive cashflow also gives you money to fund your business’s growth from your own operations without borrowing.  Knowing your cashflow allows you to plan affordable growth. This article introduces Net Cashflow and Marginal Cashflow / Current Ratio concepts for measuring Cashflow health.  Periodically measuring your Cashflow situation can make you aware of any looming problems in time to rectify them. Yellow and Blue Belt level

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