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4 key factors that drive cash flow and profit – Profit & Loss Statement

Do you ever glance at your financial statements and feel completely overwhelmed and confused? You can never fully understand your profit & loss statement?

You aren’t sure what numbers to look at or what is important and what isn’t. It can be extremely difficult to navigate, especially if you are trying to do it all by yourself.

When you receive a financial statement or report they are typically made up of the profit & loss statement along with the balance sheet that contains quite a few different numbers and calculations.

It can be a daunting task to make sense of these numbers, making you feel like you’re back in year 12 math class trying to take your math exam.

As a CFO/accountant myself, I have identified 4 key numbers that drive profit and cash flow that appear on your profit & loss statements. 

These 4 numbers will help you further understand your financial reports in greater detail and help you analyse and make adjustments where it is needed in order for your business to thrive.

  • Revenue Growth as a %

Business owners typically focus mostly, sometimes solely on revenue and sales.

Obviously, this is a critical part of your business’s finances, however, a more important aspect you should be focused on is what those sales cost you to make and cost you to fund.

These costs include labour, freight and overhead. Why is it important to know these costs?

Because if they exceed your revenue then you will be making a loss and heading for cash flow problems.

  • Price change %

This is the percentage of increase or decrease at which you sell your products and/or services in what is usually a highly competitive market.

Sometimes it can be tempting to sell at the lowest price because that is what your competitors are doing. 

However, you need to consider the costs that go into the product or service you are selling and covering these otherwise you will not be making any profit.

What many small businesses fail to do is increase their prices by a small amount regularly, resulting in a decrease or loss of profit.

That is why analysing this area on your profit & loss statement is so crucial for overall growth. 

  • Cost of Goods Sold (COGS)

These are the costs that are incurred to get the product or the service to the customer before taking into account overheads.

This is an extremely important number as it has a huge impact on your gross profit and net profit. Even a small reduction in your COGS can increase your overall revenue significantly.

Negotiating with your suppliers for better prices, even a slight decrease can do wonders for your business. 

  • Overheads %

Many business owners will spend their time focusing on the overheads in the profit & loss statements but won’t compare them relatively (by percentage) to their revenue.

Comparing them using a percentage is crucial as everything will become clearer and easier to understand.

There is no point getting bogged down in all the numbers listed as this will not be easy to understand meaning no positive changes made to increase your overall profit and cash flow.

However, if you have no budget then it can be difficult to know if overheads are reasonable anyway. Making a budget is key to success within the financial side of your business.

Like I always say “by failing to plan, you’re planning to fail”

I know it can be scary trying to navigate your way through all of these numbers and costs, the financial side of your business is arguably one of the most confusing yet important aspects.

That is why there are skilled CFOs and accountants there to help you.

If you are trying to do this all by yourself then most likely, you will fail before you succeed.

By hiring or outsourcing someone who already knows the ins and outs, then you are ensuring all bases are covered when it comes to your books.

If you want to up your bookkeeping and finance game when it comes to your business then we highly suggest checking out a few of our other articles including 

Bank Account theory vs Financial Statement theory: Making a profit when there’s no money in the bank? and Working rights and weekends