Profitability and Benchmarking: Key Financial Management Concepts
When you look at your revenue and deduct your expenses, is there a positive net? If so, that would seem like good news. But wait. Karen Felsted, CPA, consultant and small business owner, points out that your profit & loss (P&L) statement does not show your profitability. For example, your interest expense, while deducted as an expense, is not an operating cost and should nor be included when calculating profitability. Also, you may have volunteers or the owner’s spouse who contribute time and expertise. Their contributions must be considered at a fair market value before you know how profitable you are.
When you calculate your profitability (not your net), then you divide your profit by your total revenue. What do you get? What should you get?
There are a number of ways to answer that question.
You might start with a community survey – make anonymous calls as prospects to the similar businesses in your community, inquiring about their charges and services.
Another efficient way to know whether your figures are appropriate for your business is to look for benchmarks. Benchmarking is the process of determining who is the very best, who sets the standard, and what that standard is. Look to your trade association or professional association for sources. A google search might also help you find such a resource.
Profitabiilty and benchmarking are among the eight things we recommend you review when tending to the financial management of your business. See our previous blog for the list.
If you are interested in more about the concepts of profitability and benchmarking, you may wish to read the article which we wrote with regard to the veterinary profession. It was published in the August issue of TRENDS magazine, from the American Animal Hospital Association. In addition to more details on these concepts, you will read about seven other things to consider when reviewing your financial management.
That’s it for today.
Carolyn and John
Meanwhile, keep in touch. Leave us your comments. “Like” us on Facebook.
To receive our periodic newsletters, insert your email in the box on the right side of the homepage: “Sign up for ICSWorkplaceCommunication News.”