Understanding Your Business Bottom Line
As a Canadian small business owner, there are few financial health metrics more important to survival than your bottom line. What is your profit margin? How much revenue do you bring in each month/year? What are your fixed and variable costs? How capable are you of surviving into the future given your current performance?
These are all important questions that you need to be able to answer if you want to ensure sustainable operations. Starting with where to look for bottom-line insights to what you should do once you've found them, this article will dive deep into the details you need for assessing and improving business health. Past performance is a wonderful indicator of future success, and the clearer a picture you have of past performance the better prepared you'll be to navigate the path forward.
What Is A Business Bottom Line?
A business bottom line refers to a company's net income, or the money left over after all expenses have been paid. This is different from your gross profit margin, which only considers direct costs related to producing a product or service. The bottom line is far more comprehensive, taking into account all aspects of running your business – including advertising, rent, office supplies, employee salaries, and taxes.
Why Is The Bottom Line Important?
Your bottom line is important for several reasons.
First and foremost, it provides insights into whether or not a business is profitable. If your bottom line is negative, that means you are losing money each month or year of operation. Obviously, this is not a sustainable situation, and you will need to take steps to increase revenue or decrease expenses to ensure that you don't strangle your business.
Secondly, the bottom line can be used to compare your business's performance against industry averages or other companies in your competitive landscape. This will allow you to see where improvements may be possible for the sake of staying competitive.
Finally, tracking your bottom line over time can give you valuable insights into the health of your business and its ability to grow. These insights will allow you to refine operational objectives and ensure that you're doing what's in the best interest of the business.
How To Calculate Your Bottom Line
There are a few different ways to calculate your bottom line. The most common method is to take your total revenue and subtract all expenses, including both fixed and variable costs. This will give you your net profit or loss for a given period.
Another way to calculate your bottom line is to use the gross profit margin formula. This approach only takes into account direct costs related to producing a product or service. To calculate using this method, take your total revenue and subtract the cost of goods sold (COGS). This will give you your gross profit. From there, you can subtract all other expenses to get your net profit or loss.
How to Apply Bottom Line Insights
Once you have a good understanding of your business's bottom line, it's time to start putting that information to work. If you are not profitable, it'll be important to take steps towards increasing revenues or decreasing expenses. This may involve making changes to your pricing structure, marketing strategy, or the way you do business. Although this flip towards profitability should not come at the expense of growth or quality, it's important to keep in mind the long-tail effect of running unprofitably and the impact it will have on business sustainability.
If your bottom line is healthy, you can use it as a starting point for setting goals and planning for future growth. How much revenue do you want to bring in each month/year? What are your targets for net profit margins? Answering these types of questions will help you develop a roadmap for success. With accurate estimates and a solid financial foundation, you'll be able to confidently invest in new endeavors and scale your business with plenty of downside protection.
Regardless of which side you're currently on, bottom-line insights are essential for making informed decisions about the direction of your business.
From calculating an accurate bottom-line value to implementing strategic improvements for your business, expert support can be an incredibly valuable component in ensuring success. Teams like ParallelCFO were designed to help Canadian businesses navigate the financial landscape, and bookkeeping, as well as bookkeeping insights, are our specialty.
If you need a hand with managing inflows and outflows, accurately assessing financial health, or implementing strategic initiatives to ensure brighter pastures, we're here to help. Contact us today – we're excited to learn more about where you are and where you're heading.