5 tips for South African small businesses to run better

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Financial analysis is key to the performance of business. Business administration requires that as a manager one must understand the finances of the company and the Income statement is one such area.In this article, we assess the income statement of a business and review indicators it provides that help a business run better

1.Understand your Gross Profit Margin

One of the key areas for managing your business is to understand what the gross profit margin is for your business as it does its trading. ERPNext enables financial analysis to be done at that level. Before you even make any net profit or net loss you need to know if the product is even worth selling. Imagine that you are selling your product at $20 but your cost of goods sold is $19, which leaves you with a dollar to fit in all your expenses. You could still carry on with the business but now you will need to know how much volume of business you need to do with that product. Gross profit margin gives you a leeway with regards to how much overheard expenses you can fit into the business and if the business is worth it. So maybe your gross profit margin could be 20-40%, this would also give you room to make net profit at the end however your operating costs need to be known. With a small gross profit margin your operating expenses have to be super low.

2.Review your Operating Expenses

Knowing your operating expenses is not just about what percentage those operating costs are when compared to the revenue, it is also about understanding if they are the correct expenses. You could be running a consultancy businesss, by industry standard your major costs would be labour and rentals, and in some instances maybe marketing. If however you see that your expenses are dominated by vehicle maintenance or communication expenses then there would be something wrong with your business operating model. Good accounting software such as ERPNext enables you to compare your different operating expenses accounts so that you can easily determine what is costing your business.

Other things that you can assess include the movement of these expenses and their trends. If there is a sudden spike or decreases in costs then you need to investigate why they have changed. Good business administration requires that you know how to manage your costs and ensure that they are real costs.

3.Structure business operations to interest payments

Every business takes a loan or is financed in one form or the other to meet its operating costs or trading requirements. As result of this there is always finance interest that needs to be paid, and if the business is not trading within the right levels the business can fail to service the loans. When analyzing your income statement, a business manager must therefore be able to see how the business fails to pay for its interest. It could be at gross profit margin, or at the revenue level or that they are expenses that are too high that need to be controlled. A business might have a great gross profit margin but continuously make a loss at the bottom line due to high costs.

4.Failing to Trade at the right levels to replace assets

Any good business must always be planning for the future. ERPNext comes with a balance sheet for assets like any other good accounting system. In order to truly know if the business is trading at the right levels profit is required after all expenses have been considered. Depreciation is one provision that needs to be considered in the income statement. If the calculation of the depreciation provision has been done right then the business must then ensure that it trades within the right levels to be able to meet those provisions.

5. How much profit over business assets

Return on investments is critical to realizing value as a shareholder. Would money be better off in a bank, stock options or just laying idle at home? By comparing net profit over business investment, businesses can easily tell if their business is giving you back a worthwhile return. The question on how much return is good enough for investment in a business becomes a critical question to evaluate if it should be kept.