VIEWS: 12 PAGES: 2 POSTED ON: 5/3/2011
?Every business owner or financial manager wants to know where the sales or revenues are at. Sales, which translate into cash flow, are the life blood of any business. In many cases, and certainly it's not a good thing, strong revenue or sales growth can mask or temporarily hide other issues such as material costs, rising interest rates, and, in general, overall solvency. When we speak of 'sales 'more often than not we are comparing. We will often compare this month's sales to last month, or year over year, etc. It's intuitive for the owner to quickly establish a timeframe in his or her mind and compare those revenues to a previous period; month ago, year ago, etc. Sales revenue needs to be studied by the business owner in the context of other aspects of the business. We will look at some ways to look at sales, from the viewpoint of ratios (we call them relationships) in an effort to help the business owner understand overall financial importance. Since we have previously referred to sales as the lifeblood of the company we can see that meaningful analysis of revenue should be a great additional to our toolkit of understanding our business! The easiest and most basic way to view sales is from a growth viewpoint. The calculation is very simply: In terms of percent we simply take sales revenue this year, minus sales revenue last year, and divide by sales revenue last year - by multiplying that by 100 we get out sales growth number. This number is best charted in the context of a company hopefully achieving upward sales growth. When a business owner plots or charts this number over a longer period, i.e. a number of years the overall number becomes much more meaningful. And remember that even if sales growth is flat the company might be doing a bit more poorly when we take inflation into account. Companies are in danger often of growing too fast. Therefore business owners might want to calculate how fast they in fact can growth based on their current financial position. How is this number calculated? ?? We take the net income of the company divided by last years retained earnings, and multiply that by 100 to get our percentage # as an answer. If the growth rate in sales (we calculated that previously) is faster than our affordable growth rate (we just calculated this) the firm might not be able to sustain this growth. That is of course because the company will need more assets, receivables, and inventory that need to be financed. Let's look at one other final sales analysis technique - Break even. We calculate break even by taking our gross profit divided by total expenses, and multiply by 100 to provide a percentage. Business owners know that decreases in sales can sometimes mean a huge decline in profits, or visa versa. The break even calculation let's owners know how much cushion is available. If margins and expenses remain the same our calculation will show us what sales our required to break even. Owners who are very focused on profit can use this ratio often, as it will focus on sales growth to reach planned profits. Our calculation shows what sales we need to turn profits into positive territory. In summary, sales fuel a company. Business owners can use various analytical techniques to determine how revenue numbers reflect the bottom line. It's all about those number relationships! Stan Prokop is founder of 7 Park Avenue Financial. Originating financing for Canadian companies, specializing in working capital, cash flow, and asset based financing , the 6 year old firm has completed in excess of 45 Million $ of financing for companies of all size . For info and free consultation on Canadian business financing and contact details : /Home_page.html.
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