Introduction
Three fundamental financial metrics—revenue, profit, and cash flow—play pivotal roles in determining the fate of SMBs. In this article, we’ll explore Profit Drivers, their definitions, and how they impact the growth and sustainability of your business.
Details about the other drivers can be found here:
Strategic CFO Services: Revenue Drivers
Strategic CFO Services: Cash Flow Drivers
The 5 Key Profit Drivers You Need to Know
Every business owner I’ve encountered shares one common goal: to boost their profits. But how can you achieve this if you’re unsure which levers to pull or are not accurately tracking your numbers? It’s akin to throwing darts with your eyes closed, hoping to hit the bullseye.
The solution lies in understanding and managing the five key drivers directly influencing your profit. Let’s explore them:
Driver 1 – Revenue This is the income generated from sales. While there are many drivers for revenue, when it comes to profit, revenue stands alone. The objective, of course, is to retain as much of it as possible.
Driver 2 – Cost of Goods Sold (COGS) / Cost of Sales, as a % of revenue This represents the direct costs incurred to produce or provide your product or service. For a marketing agency, this might be the cost of your delivery team. For a home services business, it could be your field technicians and the cost of gasoline for your trucks. The lower your COGS percentage, the higher your profit margin.
Driver 3 – Payroll Expenses, as a % of revenue This refers to the cost of your payroll that isn’t included in your COGS, such as administrative and back-office payroll expenses.
Driver 4 – Marketing Expenses, as a % of revenue This encompasses all your marketing efforts, including SEO, digital advertising, print advertising, and branding. The goal is to capture everything that should be driving new leads to measure its ROI.
Driver 5 – Overhead Expenses, as a % of revenue This is a catch-all for every expense not covered above. We want to simplify things and group all these expenses into an overhead ‘bucket’.
These five drivers are your levers for improving profitability. The key is understanding and analyzing these drivers as a percentage of revenue. This means dividing the actual expense figure by your revenue. For instance, if your COGS is $60,000 and your revenue is $100,000, then your COGS percentage is 60% (of revenue).
By viewing these drivers as a percentage of revenue, you can gauge the relationship between your spending in cost of sales, payroll, marketing, or overhead and the revenue results. This method offers a more accurate picture of your profitability and allows you to spot potential issues or areas for improvement.
At J. Denissen CPA, we recommend monitoring these profit drivers monthly and comparing them to past periods. By doing so, you can identify trends, understand why your profits are the way they are, and plan small improvements in each area behind the profit drivers.
Take the First Step Towards Profit Mastery Today
Understanding and effectively managing your profit drivers can be a game-changer for your business. It empowers you to make data-driven decisions, identify opportunities for improvement, and ultimately, increase your profitability. At J. Denissen CPA, we specialize in providing fractional CFO services that help business owners like you navigate these crucial aspects of financial management.
Don’t let confusion about your financials hold your business back. Reach out to us today and let’s work together to unlock your business’s full profit potential. Book a ‘Right Fit Call’ meeting now and take the first step towards mastering your profit drivers.
Remember, your business’s profitability shouldn’t be a mystery. With J. Denissen CPA, you’ll gain clarity, control, and confidence in your financial journey. Let’s start making your numbers work harder for you today.
Book your meeting here.
