How to Maximize Your Business Profits

Making a profit is the most important - some might say the only - objective of a business. Profit measures success. It can be defined simply: Revenues - Expenses = Profit. So, to increase profits you must raise revenues, lower expenses, or both. To make improvements you must know what's really going on financially at all times. You have to watch every financial event without any kind of optimistic filter.

This Guide is a series of questions with comments to help you analyze your profits, their sufficiency and trend, the contribution of each of your product lines or services to them, and to help you determine if you have the kind of record system you need. The questions and comments are not meant to be definitive presentations on the subjects. They are meant to point to areas where further study might be - well - profitable.

Are You making A Profit?

Analysis of Revenues and Expenses

Since profit is revenues less expenses, to determine what your profit is you must first identify all revenues and expenses for the period under study.

1.  Have you chosen an appropriate period for profit determination?

For accounting purposes firms generally use a twelve month period, such as January 1 to December 31 or July 1 to June 30. The accounting year you select doesn't have to be a calendar year (January to December); a seasonal business, for example, might close its year after the end of the season. The selection depends upon the nature of your business, your personal preference, or possible tax considerations.

2.  Have you determined your total revenues for the accounting period?

In order to answer this question, consider the following questions:

What is the amount of gross revenue from sales of your goods or service?  (Gross Sales)

What is the amount of goods returned by your customers and credited?  (Returns and Rejects)

What is the amount of discounts given to your customers and employees?  (Discounts)

What is the amount of net sales from goods and services? (Net Sales =  Gross Sales - Returns and Rejects + Discounts))

What is the amount of income from other sources, such as interest on bank  deposits, dividends from securities, rent on property leased to others?  (Non-operating Income)

What is the amount of total revenue? (Total Revenue = Net Sales +  Non-operating Income)

3.  Do you know what your total expenses are?

Expenses are the cost of goods sold and services used in the process of selling goods or services. Some common expenses for all businesses are:

Cost of goods sold (Cost of Goods Sold = Beginning Inventory + Purchases -  Ending Inventory)

Wages and salaries (Don't forget to include your own- at the actual rate - you'd have to pay someone else to do your job.)

Rent

Utilities (electricity, gas telephone, water, etc.)

Delivery expenses

Insurance

Advertising and promotional costs

Maintenance and upkeep

Depreciation (Here you need to make sure your depreciation policies are  realistic and that all depreciable items are included)

Taxes and licenses

Interest

Bad debts

Professional assistance (accountant, attorney, etc.)

There are of course, many other types of expenses, but the point is that every expense must be recorded and deducted from your revenues before you know what your profit is. Understanding your expenses is the first step toward controlling them and increasing your profit.

Financial Ratios

A financial ratio is an expression on the relationship between two items selected from the income statement or the balance sheet. Ratio analysis helps you evaluate the weak and strong points in your financial and managerial performance.

4.  Do you know your current ratio?

The current ratio (current assets divided by current debts) is a measure of the cash or near cash position (liquidity) of the firm. It tells you if you have enough cash to pay your firm's current creditors. The higher the ratio, the more liquid the firm's position is and, hence, the higher the credibility of the firm. Cash, receivables, marketable securities, and inventory are current assets. Naturally you need to be realistic in valuing receivable and inventory for a true picture of your liquidity, since some debts may be un-collectable and some stock obsolete. Current liabilities are those which must be paid in one year.

5.  Do you know your quick ratio?

Quick assets are current assets minus inventory. The quick ratio (or acid-test ratio) is found by dividing quick assets by current liabilities. The purpose, again, is to test the firm's ability to meet its current obligations. This test doesn't include inventory to make it a stiffer test of the company's liquidity. It tells you if the business could meet its current obligations with quickly convertible assets should sales revenue suddenly cease.

6.  Do you know your total debt to net worth ratio?

This ratio (the result of total debt divided by net worth then multiplied by 100) is a measure of how company can meet its total obligation from equity. The lower the ratio, the higher the proportion of equity relative to debt and the better the firm's credit rating will be.

7.  Do you know your average collection period?

You find this ratio by dividing accounts receivable by daily credit sales. (Daily credit sales = annual credit sales divided by 360.) This ratio tells you the length of time it takes the firm to get its cash after making a sale on credit. The shorter this period the quicker the cash flow is. A longer than normal period may mean overdue and un-collectible bills. If you extend credit for a specific period (say, 30 days), this ratio should be very close to the same number of day. If it's much longer than the established period, you may need to alter your credit policies. It's wise to develop an aging schedule to gauge the trend of collections (without adequate financing charges) hurt your profit, since you could be doing something much more useful with your money, such as taking advantage of discounts on your own payables.

8.  Do you know your ratio of net sales to total assets?

This ratio (net sales divided by total assets) measures the efficiency with which you are using your assets. A higher than normal ratio indicates that the firm is able to generate sales from its assets faster (and better) than the average concern.

Once you have Determined what type of business you want to start and The investment requirements, you are prepared to decide on a
location. The number of aggressive companies already in the area should affect your choice of location. Some regions are bombarded
with support stations or certain forms of restaurants. Check on the amount of your type of business in Census figures, the yellow
pages, or by personally checking out the place.

Factors other than the potential market, availability of Workers And number of aggressive companies have to be considered in
selecting a place. For example, how adequate are utilities - sewer, water, power, gas? Parking facilities? Police and fire
protection? What about housing and environmental things like colleges, cultural and community actions for employees? What is the
average cost of this place in taxes and rents? Check on zoning regulations. Evaluate the enterprise of the neighborhood
business-people, the aggressiveness of civic associations. In summary, what is the town spirit? Such factors should provide you an
idea to the city or city's future.

Chambers of Commerce and nearby universities usually have made or Are familiar with local polls that can provide answers to these
questions and the a number of other questions that will happen to you.

Then you must decide in what area of city to find. If the town is Very small and you are establishing service or retail business,
there'll probably be little choice. Just 1 shopping area is present. Cities have outlying shopping centers along with the central
dining area, and stores spring up along main thoroughfares and local streets.

Consider the shopping center. It's different from other locations. The shopping center building is pre-planned as a merchandising
unit. The website was intentionally selected by a developer. On-site parking is a frequent feature. Customers may drive , park and
do their buying in relative safety and speed. Some facilities offer weather protection. Such conveniences make the shopping centre
a valuable location.

There are also some limitations you ought to know about. As a tenant, You become part of a retailer group and has to pay your pro
rata share of the budget. You must keep store hourslight your windows, and set your signs based on established rules. Many
communities have restrictions on evidence along with the middle management might have further limitations. What's more, if you are
thinking about a shopping centre for your first shop you may have an additional issue. Developers and owners of shopping centers
start looking for successful retailers.

The type and variety of merchandise that you carry helps determine the Type of purchasing area you choose. For example, clothing
shops, jewelry shops and department stores are more likely to be prosperous in buying districts. On the other hand, grocery
stores, drug stores, filling stations, and bakeries do better on main thoroughfares and local streets beyond the shopping
districts. Some kinds of shops customarily pay a low rent per square foot, while others cover a high rent. At the"low" category
are furniture, grocery stores and hardware stores. At the"large" are cigar, drug, women's furnishings, and department stores.
There's not any hard and fast rule, but it's helpful to see in which type of place a shop like yours often seems to flourish.

After deciding an area best suited to your type of business, Obtain as many details as possible about it. Check the competition.
How many similar companies can be found nearby? What does their sales volume seem to be? If you are establishing a store or
support trade, how far is it that people come to trade in the region? Are the visitors patterns positive? If the majority of your
customers will probably be local populations, research the population trends of the region. Is population climbing, static or
declining? Are the people native-born, mixed or chiefly foreign? Are fresh ethnic groups coming in? Are they mostly laborers,
clerks, executives or retired men? Are they all ages or mostly retired, middle aged, or young? Judge purchasing power by checking
average house rental, typical real estate taxes, number of telephones, number of automobiles and, even if the figure can be
obtained, per capita income. Larger shopping centers have this type of information out there, and will make it available to
serious potential tenants.

Zoning ordinances, parking availability, transportation facilities And natural obstacles - such as bridges and hills - are
important considerations in finding any kinds of company. Potential sources for this information are Chambers of Commerce, trade
associations, real estate businesses, local newspapers, banks, city officials, neighborhood merchants and private monitoring. In
the event the Bureau of the Census has developed census tract data to the particular region in which you are interested you will
find this especially helpful. A census tract is a small, permanently established, geographical area within a big city and its
environs. The Census Bureau provides population and housing characteristics for every tumor. This information could be valuable in
measuring your marketplace or service potential.

Choosing the actual site within an area might well be taking what you Can get. Very few buildings or plants will be appropriate
and at the exact same time, available. If you do have a choice, be sure to consider the chances carefully.

For a production plant, think about the condition and suitability Of the building, transportation, parking facilities, and the
sort of lease. For A store or service establishment, assess out the nearest competition, traffic Flow, parking amenities, road
location, physical aspects of the building, Type of lease and cost, and the rate, cost and quality of transportation. Additionally
Investigate the history of the site. Find answers to such questions as: Has the Building remained empty for any length of time?
Why? Have various Kinds of Stores occupied it for brief periods? It might have proved unprofitable for them. Websites on which
many businesses have failed ought to be avoided. Vacant buildings Don't bring traffic and are usually considered bad neighbors,
therefore check on nearby unoccupied buildings.

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