Look closely at your SME’s income statement, and you may be able to see more than just numbers. In fact, there are opportunities for growth and better performance that most business owners pass by without realising it. Let’s explore what those opportunities are and how you can spot them. 

Understanding Your Financial Picture 

Your company’s incomings and outgoings tell a story about your business’s well-being. When you look at the total earnings and spending patterns, you can determine just how profitable your company really is. By looking carefully at these numbers, you will find ways to make your business work better. 

According to the World Economic Forum‘s Global Competitiveness Report, getting money to grow is still one of the biggest problems for SMEs around the world. Small and medium-sized businesses create almost 70% of jobs and money worldwide, but they often can’t get enough funding to grow. This problem is worse in developing countries, where strict rules and limited access to money make it harder for SMEs to expand. 

The World Economic Forum’s Future of Jobs report shows that SMEs need good training in finance and digital skills to succeed in today’s digital economy. Since technology has already brought changes to business operations, SMEs have to learn the use of new digital tools to sustain success. Investment in digital systems with workforce training for new skills—in collaboration with Pulse—can help SMEs discover new avenues for growth and infuse fresh ideas into the workplace. 

Looking Beyond Basic Numbers 

Finding valuable insights in your SME’s income statement can be both exciting and essential for making your business perform better financially. Pulse can help with this by showing you up-to-date information and helping you make better decisions more quickly. 

Before diving into an income statement, it’s good to know the differences between common and less common measurements. While everyone looks at revenue, cost of goods sold, and net income, the real insights usually come from less obvious numbers. Understanding these different measurements can help you better grasp your company’s financial health and make smarter improvements. 

Key Financial Measurements to Watch 

Gross Margin Percentage 

Though you may know about gross profit, the gross margin percentage is derived from dividing gross profit by revenue, and it provides a better view of how your production process is working over time. A high gross margin reflects that your company retains a good amount of its revenue after paying for direct costs. 

Consider a company manufacturing smartphones. Examples of direct costs include screens, batteries, processors, workers’ salaries, and factory operating costs. If these are subtracted from the money that comes in with the sale of phones, what remains constitutes the profit of the company from the production of phones. 

The company can then utilise this money for various things: growing the business, paying shareholders, saving for later, or paying off loans. If there is an ample amount of money remaining after direct costs, that simply indicates that the company is conducting its manufacturing in a highly productive manner and gaining good profits. 

Operating Margin 

Also known as return on sales, this is calculated by dividing operating income by revenue. It looks at all running costs and shows how efficiently your company operates. It tells you what percentage of your earnings remains after you’ve paid for both making your products and running your business. 

EBITDA 

(Earnings Before Interest, Taxes, Depreciation, and Amortisation): Consider EBITDA as a rough estimate of your cash flow but without including things like interest, taxes, and equipment wear and tear. It helps in indicating the profitability of the main business activities and thus makes the comparison of companies operating in the same sector quite easier. While there are several ways to calculate it, EBITDA mainly focuses on basic costs like wages and materials rather than other expenses. 

Return on Assets (ROA) 

This figure indicates how well your company uses its assets to generate profits. You obtain it by dividing your net income by the average value of all that your company owns. A high ROA indicates that you are using your assets well, while a low one might indicate poor value from what you own. 

Return on Equity (ROE) 

This measures your annual return and reveals how effectively you are using shareholders’ money to generate profits. You get this number by dividing net income by the average amount of shareholder money in the business. It is particularly useful because it relates your profit to your balance sheet, hence showing how well you are utilising the money of investors. 

Real-World Examples: How These Numbers Matter 

Let’s consider two fictional retail SMEs to see how these measures actually work: 

Company A has a higher gross margin percentage than Company B, which indicates it is better at managing its production costs or pricing. Even though both firms realise similar money, Company A’s superior gross margin hints that it manages costs more effectively, leaving perhaps more money to invest. 

However, Company B has a superior operating margin despite lower gross margins. That means it may spend more to make the products, but it is very efficient in terms of controlling its day-to-day running costs. With a closer look at its costs, Company B might find ways to improve and make more profit. 

Looking at EBITDA, Company A outperforms Company B, showing that, overall, it runs more efficiently. This might encourage Company B to reassess their costs and find ways in which they can work more effectively. 

ROA and ROE are important indicators of how efficiently the companies use their resources and shareholders’ money. Company A has a higher result in both cases, meaning it is better at converting its resources and investments into profit. Company B should consider changing how it uses its assets or manages money to perform better. 

Practical Steps to Take 

Here’s how your SME can use these insights: 

Check your performance regularly: Look at both common and uncommon numbers in your income statement to spot trends. Do a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) so you can adjust your business plans when needed. 

Compare to others: Look at how your numbers stack up against similar businesses to see where you can improve. Some tools give you industry data to help do this. Watch for Pulse’s upcoming comparison feature! 

Leverage technology: Take full advantage of financial software that automatically analyses your data to provide immediate visibility into the performance of your business. Such tools can ease reporting and help you make better decisions based on real information. 

Get expert help: Don’t hesitate to ask financial experts for advice, especially when dealing with complex numbers. A fresh pair of eyes might spot things you’ve missed and find new opportunities. 

Pulse will revolutionise the way you work by providing financial insight. Our real-time analytics enable you to make speedy decisions and respond to altered market conditions.  

Wrapping Up 

In today’s fast-moving business environment, SMEs need to carefully consider their income statements and overall organisation. Dig deeper into your SME’s financial numbers and use advanced tools like Pulse to build lasting growth and better profits. Request a callback today and take a more active approach toward managing your money, constantly improving strategies based on real data to stay ahead in today’s changing business world. 

Keep in mind that there is more to your numbers than just income versus spending. These key measurements will provide a deeper understanding of how your company is doing financially. By applying these insights to financial planning, SMEs can find new ways to grow, use resources more effectively, and tackle challenges head-on with confidence in our ever-changing market.