Gross profit is the profit a business makes after deducting the costs directly associated with making its products or providing its services. It’s a measure of two critical performance indicators:
1. Is the business making enough sales?
2. Is the business making enough margin on its sales to justify the effort involved and generate a return on the activities?

That’s why Gross profit is one of the most important parts of any business financial report. Without enough gross profit, the business will not be able to sustain the fixed costs (overheads) of running the business or give sufficient return to the investors or owners of the business.

Ineffective understanding of gross profits is a key reason why so many small business owners can’t afford to pay themselves.

One of the critical principles behind accounting statements is that revenues are matched with the related costs of providing the products or services from which the income is derived.

This enables the profit of the business activities to be properly measured, whether that is over a time period, by a product group, by market sector, or by customer.
If you don’t know exactly how much it costs you to deliver your products or services you are putting your business at significant risk. Businesses have failed just as they were starting to grow because they got these numbers wrong.

Management of overhead costs is critical to ensuring that a business is profitable. Overheads, sometimes called indirect costs are incurred by the business but do not directly contribute to the cost of the product or service. These are usually “Fixed” and do not increase significantly with volumes.

As overheads are largely not related to volumes, these are reviewed against past trends and strict budgets. Also awareness of technology changes may bring the opportunity of introducing new systems which can improve the effectiveness of sales and administration activities and reduce costs.

Cost cutting measures along with stringent budgetary control and authorisation of spend will ensure lower overheads and better profitability.

For almost every business, the most important component is access to sufficient working capital.

Cash is critical to business success. While our focus might be on making sales and profit, if this is not translated into cash, our business will go down. 40% of business failures are due to lack of cash.

We need cash to pay our staff on time and keep them happy. We also need to pay our material suppliers, otherwise they may not deliver the items we need to get a job completed.

Having enough cash in the bank means that cashflow problems do not become a distraction which takes us away from other important issues of running the business.

Some of the most profitable businesses have been brought undone by having limitations on their working capital; during growth phases, acquiring new businesses or when the market changes.

When looking for finance; whether to purchase capital equipment, fund growth or manage cashflow fluctuations it is important to understand the range of finance options available so you can select the most appropriate option for your circumstances.

Debtors are people or businesses who owe you money. Effective management of your debtors (often referred to as credit management) will help you get paid faster and prevent bad debts. It will also help you maintain a healthy cash flow.

Credit management includes:

• Collecting debts on time
• setting credit limits and payment terms
• making credit applications and credit checks
• enforcing a clear credit policy