6 Indicators That Your Business Is Financially Healthy
Imagine: a successful organization, the number of branches and the team is growing, and every week the owner is interviewed. It seems that here it is – a dream company. But suddenly – bankruptcy. It’s a shock, but it happens when the financial health of a business is judged solely by the scale of the organization and the really important factors are ignored. If you have financial difficulties, you can always contact Payday Depot.
To understand that the company is financially healthy, different profitability will help. Imagine that a business is a machine. When the engine is running, one light comes on, and when the engine is another. Profitability is the “light bulb” by which you can determine exactly where the problem arose.
Profit Margin
Marginal profit is revenue less variable costs. Imagine that a firm that makes furniture receives a request for a wooden table. Materials are a variable cost throughout. They wouldn’t exist if the order didn’t exist. The marginal profit margin will reveal what portion of the funds from an order stays with the business after the transaction is complete and what portion was used to provide a service or make a good.
Gross profit margin
We take the revenue of one line of business, subtract variable and general production costs – and we get the gross profit. And the gross profit margin will tell you whether the direction is worth all the costs and effort – or it’s time to cover it up.
Operating profit margin
We subtract variable and fixed costs from revenue and net operating profit. Variables are those that may or may not exist. But you can’t get away from constant expenses: you need to pay rent and pay salaries, even if there are no orders. Thanks to operating profit margin, we will see how fixed costs affect the well-being of a business.
Net profit margin
Revenue, excluding taxes, variable and fixed costs, loan payments, depreciation on equipment, etc., is specified as net profit. We will know what portion of the revenue we finally have the right to consider net profit once we have calculated the net profit margin. How he calms down! Even an enormous turnover does not impress. Even with a 120 million dollar turnover, there is a likelihood that some of it came from unprofitable business dealings when products were sold at a loss.
Return on assets
The company’s assets include finished products, stocks in warehouses, equipment, real estate, and raw materials. If you have just expanded your business, bought a new machine for production or any other equipment, and see that the figure is falling, everything is in order, do not worry. It should grow in 3 months. If, after three months, the indicator is still falling, it’s time to take inventory of the warehouse, collect accounts receivable, or sell equipment that no one has been using for a long time.
Return on equity
Is the rate decreasing? Okay, the owner’s money doesn’t make the company much profit. Let’s go look at other profitability; what about them? Perhaps selling cheap? Or increased fixed costs? Do we buy materials at exorbitant prices? Need to figure it out. Is the rate decreasing? Okay, the owner’s money doesn’t make the company much profit. Let’s go look at other profitability; what about them? Perhaps selling cheap? Or increased fixed costs? Do we buy materials at exorbitant prices? Need to figure it out.
