During turbulent times, companies do more with less. For your business to develop winning ways during these challenging times, benchmarking is a very effective way of staying ahead of your competitors.
Benchmarking takes financial figures from your accounting system and converts them into ratios, which allows you to compare your results to those of your competitors. These figures are usually expressed as a percentage of sales or profits, before abnormal items are taken into account.
Benchmarking is working ‘on’ your business rather than ‘in’ your business.
Over the next six weeks, we will examine how benchmarking with your business, will drive your profits up and your costs down.
A detailed benchmarking analysis can provide the business owner with financial details and ratios that can relate to staffing, office or warehousing space and costs, administration, your products and/or services through to how much of the budget is spent on marketing or advertising.
This week we will look at the following benchmarking activities:
- The difference between gross profit and margin
- The difference between mark up and margin, and
- What is the break-even point?
While next week, we will look at what is break-even analysis and how to calculate the break even point for:
In weeks three to six, we will look at factors such as stock control, finance, planning and management and their impact on your cash flow.
What is the difference between gross profit and margin?
Margin is measured as ratio, profit as a dollar amount. In both cases, they measure the difference between cost of materials and revenue. Gross margin/profit do not consider the cost of doing business (i.e payroll, taxes, etc). In retail, margin represents the mark up from the wholesale price.
What is the difference between mark up and margin?
Mark up is the difference between the cost of goods and what you are asking to sell the goods for. Margin is the difference between the cost of goods and what you actually sell it for.
What is the break-even point?
The break-even point is where the profit starts. All business owners need to know how many sales have to be made before all expenses are covered and actual profit starts. You could have a business with a large turnover, but still be running at a loss. Know your break-even point.
Next week, we will go deeper and explore break-even analysis and how to calculate the break even point for:
- Average total revenue per unit
- Average per unit cost
- Average month’s fixed running costs.
Reference: Bright Ideas for Small Businesses – how to get your Cash Flowing efficiently, Charisse Gray, 2009.
