"How is your business doing?"
"Sales are great"
But are they really?
Sales are one indicator of business performance, but there are good sales and bad sales.
Generally sales are viewed as a trend over a period of time, you might view them against budget, compared to last year, as a trend or a rolling average. Generally a trend will give you a better indication of performance, but there are many other influencing factors.
The sales line in your Profit & Loss Statement is an accumulation of three drivers - customers, how much they spend and the number of times they buy.
Monthly sales of $100,000 might be 100 customers, spending $100, 10 times per month, or it might be 1000 customers spending $20, 5 times a month. Which is better?
So sales is not just a total number but the quality of the number, and whenever possible you need to monitor all three drivers. If your number of customers and the number of visits is staying the same or reducing, but you average spend is increasing your business will be better off.
Imagine John comes in to your shop and purchases a widget for $10. It cost $5 dollars to make, and takes 15 minutes for your salesperson to process the sale, package it up and collect the money. Assuming wages of $20 per hour, at this point you have just recovered your direct costs.
Then in comes Sally - she purchases 20 widgets packed in a box of 20 for $200, with the same cost to make and the same amount of time for the salesperson to process the sale, (they are already packaged), and then collect the money. Now you have made a Gross Profit on the transaction of $95.
Not all sales are equal - if you would like help understanding how your business is performing contact the Engine Room team in Pukekohe or Tauranga for a free consultation
So how is your business doing? Are sales going as well as you thought? Are you monitoring cost of sales?
Follow this link to find more about understanding your financial statements