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CompensationMaster Newsletter Article, April 2003 By David Cocks and Dennis Gould, Managing Partners
Now that tax day is over, how did you do? Did you pay
substantial taxes on your profit? Or wasn't there much profit?
Invest an hour today to analyze your current profitability and
strengthen your company for the coming year.
First, obtain the following statistics for the past three
years. If you don't already have them at your fingertips, your accountant
should be able to provide the information:
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Total revenue |
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Total expenses |
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Operating profit |
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Sales representatives ranked by production |
Start by looking at the trends.
Revenue and profit should both be increasing. Calculate the percentage
increases. Revenue and profit should be growing at about the same rate. Are
they?
Now look at expenses. They
should be growing at a slower rate than revenue—and, optimally, slower than
profit. Calculate percentage increases for all the major expense categories.
Which categories are growing the fastest? Are those temporary investments or is
that rate of growth likely to continue? Finally, look at production levels for
your sales force over the past couple years. Calculate percentage increases
again. Are they fairly constant? Although significant improvements in
productivity might seem like a positive, they often cause financial problems.
How does everything look?
Did you see anything that surprises you? A quick profitability analysis like
this can provide a great deal of insight into your business.
Most business owners focus more intensively on cash flow than
on profitability, but sustainable profitability determines the long-term value
of your company and is the best predictor of its future survival. It makes
sense to take an hour a couple times a year to perform this analysis and make
sure your company remains on track.
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