Before people finally decide to establish a business, what are the things that they should think about?
Do they consider the location, the demand for the product or service, or their available resources? While these mentioned factors need to be considered in entering the business world, identifying goals must not be missed as well.
Most of the financial management goals of every existing business are to increase market share, reduce expenses, and magnify profits. Let us have a look at each one.
Increase profits
The most important goal of a company is to make money and be able to keep it. And one way to measure how much money a single company makes from its total sales or total revenue is through profit-margin ratios.
Gross Profit Margin. This profit margin ratio supplies the profit a company makes on its cost of goods sold or cost of sales. It specifies how efficient the management makes use of labour and supplies in the process of production.
Know that gross profit margins may vary from different businesses and industries.
Operating Profit Margin. This ratio shows how successful the management of a company is in generating income from the operation of the business by comparing the earnings before interest and taxes (EBIT) to sales.
The operating profit margin is a rough measure of the operating leverage a company can attain in the duration of the operational part of the business. It specifies the EBIT generated per dollar of sales. If the operating profit is high, this means that the sales are increasing faster than the operating costs or the company has an effective control over the costs.
Since such a ratio not only accounts for the costs of labour and materials but also selling and administration costs, it should have a smaller figure than the gross profit margin ratio.
Net Profit Margin. Defined as those generated from all of the phases of the business including the taxes. This ratio compares the net income with the sales.
Similar to gross and operating profit margins, net margins do vary in different industries. In software businesses, gross margins are found to be very high while net profit margins are lower. And in discount airline companies, gross and net margins are higher.
Learn that just like all other ratios, margin ratios do not offer accurate information.
Reduce costs
The ways for companies to manage and reduce the expenses of their business is through cost control being the other goal of financial management. Through evaluation and identification of all the expenses spent by the business, the management is able to determine whether the costs are affordable and reasonable. And then look for means to reduce the costs which can be done by methods such as cutting back, moving on to other service providers, or changing to a less expensive plan.
For companies to be profitable, they must learn how to control costs and not just earn revenues.
Maximise market share
This can be calculated by taking the sales of a company over a given period and then have it divided by the total sales of the specific industry over the same period. Market share is the metric that provides a hint of the size of a company relative to its competitors and the market. If a company grows its market share, its revenue will be growing too, even faster than its competitors.
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