Understanding your cost to do business, calculated as the difference between gross sales and net income, is crucial for maximizing profitability and financial stability.
Primary Implication
Your Cost to Do Business is the amount between your top-line Gross Sales and your bottom-line Net Income.
You and your business win by continuously pushing yourself to manage your business’s assets more effectively while simultaneously controlling the expenses flowing through your sales, operations, finance, and administration functions.
Overview
Not enough small business owners know what it costs them to do business. They don’t bother looking at the dollar difference between their Gross Sales and Net Income. This simple calculation confirms that the lower your total expenses paid out of each sales dollar, the higher your bottom-line results.
Winning or losing in the game of business is measured by your ability to convert a dollar of sales into a profit. Knowing your costs across your business, at both the gross profit and operating income, is the key to shrinking the gap between Gross Sales and Net Income. Your financial statements and select finance ratios shed light on your field of play, so you’ll confidently know your next move to higher profits.
The formula for calculating your Cost to Do Business is as follows:
Gross Sales – Net Income
Gross Sales of $1,000,000 and net income of $50,000 is the same as $1.00 – $0.05 = $0.95 or your cost to do business on every dollar sold. Put another way, you spent $950,000 chasing after the $50,000 you earned from the original million in gross sales. Every cent you don’t spend is a penny that drops straight to your bottom-line.
When your costs are high, the pressure to achieve profits is even higher as shown below:
Lower Creates Opportunity: The lower your total expenses paid out of each sales dollar, the higher your bottom-line results.
Higher Creates Challenges: The higher your cost structure, the smaller your safety net intended to cover any “surprises” that could quickly drain your cash position.
Those who don’t watch the changes in their Cost to Do Business are 100% more likely to have a higher cost structure than they can afford than those who do know what their Cost to Do Business should be compared to what it is.
Don’t do this. Use the power of the BusinessCPR™ Management System to help you use the information in your financial reports to improve your business’s profitability and cash performance.
