Measuring the financial success and viability of a business is not just the role of the Finance Department, in fact the most successful organisations make it part of each departments overall responsibilities.
You do not need a degree in accounting to help count the ‘beans’ and help steer your business to financial success.
Below are 5 examples of common business units within an organisation and some top tips on how they can measure their financial health.
Revenue, also known as your ‘top line’ is simply a reflection of your sales. Most organisations measure this in dollars but you could also measure it in any unit of measure that is relevant to your business. Eg Kilos sold, hours billed or cartons sold. Most organisations measure revenue performance as a percent increase or decrease on the previous year.
Departments that this would be most relevant to are the Sales and marketing teams of a business.
2. Costs of Goods Sold (COGS)
Refer to the raw material costs a business incurs to make its products.
For example the cost of stock in a bottle shop, the cost of wood for a furniture maker or the costs of parts to build a car. It is often calculated by measuring opening and closing stock positions measured via stock takes. It can be expressed by the formula; Beginning Inventory + Inventory Purchases – End Inventory = Cost of Goods Sold
Departments that have the greatest influence over this financial measure are the procurement and operational teams.
3. Gross Margin
Gross Margin = Sales Revenue – Costs of Goods Sold. It is a measure of how much a business gets to keep from every sale made. The aim is to maximise the sale price whilst minimising the input prices.
This measure is key to the sales and operations teams.
4. Cost of Doing Business
This refers to all the expenses it costs a business to make and sell it’s goods and or services. A business needs to focus on keeping each cost line as low as possible to maximise margin. Some examples of cost lines include, rent, wages, utilities, insurance etc.
This measure is key to the operations and support departments of the business as they have the greatest ability to influence this area of finance.
5. Net Profit or EBIT
EBIT or Earnings before interest and taxes is the net profit or loss of an organisation.
EBIT can be expressed as EBIT = Revenue – Operating expenses (OPEX) + Non-operating income.
EBIT is all profits before taking into account interest payments and taxes. Some organisations use EBITDA which is earnings before interest and tax minus depreciation and amortisation of assets. In simple terms EBITDA is the end result of an organisations financial profitability.
This financial measure is the responsibility of each department as they all contribute to the EBIT or EBITDA.
The bottom line is often the most important driver in any organisation and managers in all areas of an organisation need to make effective decisions to maximise equity. Happening People offer a very successful program “Finance for Non-Finance Managers” This program will provide participants with the knowledge, skills and confidence to be financially literate. For more information click here or contact us on 1800 68 67 69 or www.happeningpeople.com