So, we have looked at why variable costs are not truly variable and why they will in fact change with changes in sales and not always be a flat percentage. Why is this important? Well, it’s good to understand that you might see some cost advantages to growth, but it is also important to see that you may have to make changes to your cost structure to support that growth. Will you need to increase the number of production employees you have and then, if so, will you be able to have the sales going forward to keep them busy all the time? Remember, they don’t just come in for your busy week and then stop working when you get slow again. If you are expecting a slow period coming up, should you assume that COGS might increase as well? It is important to truly understand your variable costs and therefore gross margin when planning for the future so that you know exactly how much you can expect to be leftover to cover fixed costs and to provide a profit for the business.
Most people will look at a P&L and argue that profits (or losses) are the most important line. In fact, by name the statement is called the Profit & Loss statement so it must be the most important! It’s not. The bottom line is simply an output- it is not something that can be measured or changed without influencing the other items in the statement, so while it is important, it is not the most important. So which line is? The top line- revenues, and here’s why: the amount of money you bring in from sales determines the amount of money that can flow through the rest of the P&L (the business).
Once you understand your business from this perspective, every decision that you make is aimed at improving your overall financial position. In simpler terms, this understanding helps you make decisions that will increase profits and better your cash flow. It makes sense then, that the leadership team making decisions that impact the business on a daily basis should also understand the business from the financial perspective.
The most important line of a Profit & Loss Statement is the bottom line: profit. It’s safe to say that every employer, employee, and customer c...
Benchmarks Are Important Business owners have long been advised to “benchmark” to gain a sense of how their business is performing. Benchmarking ...
What is Gross Profit? Gross profit in the food industry is the product of two important expenses: labor & cost of goods (food cost). In restaur...
Types of Costs: In the simplest of terms, variable costs are associated directly with the sales of a product or service and therefore increase and ...
So, we have looked at why variable costs are not truly variable and why they will in fact change with changes in sales and not always be a flat percentage. Why is this important? Well, it’s good to understand that you might see some cost advantages to growth, but it is also important to see that you may have to make changes to your cost structure to support that growth. Will you need to increase the number of production employees you have and then, if so, will you be able to have the sales going forward to keep them busy all the time? Remember, they don’t just come in for your busy week and then stop working when you get slow again. If you are expecting a slow period coming up, should you assume that COGS might increase as well? It is important to truly understand your variable costs and therefore gross margin when planning for the future so that you know exactly how much you can expect to be leftover to cover fixed costs and to provide a profit for the business.
Most people will look at a P&L and argue that profits (or losses) are the most important line. In fact, by name the statement is called the Profit & Loss statement so it must be the most important! It’s not. The bottom line is simply an output- it is not something that can be measured or changed without influencing the other items in the statement, so while it is important, it is not the most important. So which line is? The top line- revenues, and here’s why: the amount of money you bring in from sales determines the amount of money that can flow through the rest of the P&L (the business).
Once you understand your business from this perspective, every decision that you make is aimed at improving your overall financial position. In simpler terms, this understanding helps you make decisions that will increase profits and better your cash flow. It makes sense then, that the leadership team making decisions that impact the business on a daily basis should also understand the business from the financial perspective.
