What drives your profit?

The Six Drivers of Business Profitability

Although every business is unique, there are ways to measure and beachmarch results that reflect the patterns that are particular to your company. If you build a measurement systems with the following concepts as beachmarks, you will surprised at the results.

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There are 6 drivers of net profit. They are:

1. Average prices

2. Average transaction size (that is, the number of units per transaction) Together 1 and 2 make Average Transaction Value. 3. Number of transactions
Total revenue is equal to Average Transaction Value x Number of Transactions.
Drivers 1, 2 and 3 determine revenue. Most times you will not be able to easily isolate the Average Price and Transaction Size unless you have access to the detailed transactions. However, if you know the total Number of Transactions (or a close approximation is always good enough for a high level analysis) you can work with Average Transaction Value (drivers 1 and 2 combined).

For a visual view of the effects  click this link  What Volume Can I Afford To Lose If

4. Average cost of goods sold
Cost of Goods Sold is a variable cost in the sense that it varies directly with the volume of revenue. Gross Profit is the difference between Total Revenue and Total Cost of Goods Sold. It is the amount left after variable costs have been covered. The Gross Profit % is equal to Gross Profit / Total revenue.

5. Direct expenses
These are enterprise overheads that are directly associated with, and can be easily traced to, the revenue generating activities of a business. They may be variable but are usually fixed in the sense that they are not driven by revenue. For example, if a
retail business had 5 stores, the costs directly associated with each store (as opposed to those that are associated with the business as a whole) would be classified as direct costs. In a business that has only one store, you might want to classify non-variable sales and marketing expenses as direct.

6. Enterprise overheads
Enterprise overheads are all other expenses not classified as part of COS or Direct Expenses. These are expenses necessarily incurred in running the business.