Ever think that your income statement can do much more for your business? For most SMEs, financial reports seem to be just something done as a routine, but there lies within those numbers pure gold waiting to be unearthed.
Unlock the full potential of your SME’s income statement only when you rise beyond the surface figures of the report and delve into the nuances that help find elusive growth and optimisation opportunities. This blog will cover insights frequently overlooked by small and medium enterprises (SMEs).
Why Your Income Statement Matters
Revenue and expense are the significant performance indicators of business health, indicating everything about the direction of a business in terms of operational efficiency and strategy. By reviewing how you generate revenue and manage expenses, you can pinpoint areas wherein changes and improvements would lead directly to increased margins for your profit and loss.
The Bigger Picture: Global Challenges for SMEs
According to the World Economic Forum Global Competitiveness Report, access to funding remains one of the key difficulties confronting SMEs across the world. Nonetheless, despite being the backbone of many economies, nearly 70% of jobs and GDP worldwide feature SMEs, which mainly face blockages in accessing funds for growth and expansion in emerging markets.
The Future of Jobs Report by the World Economic Forum calls attention to the increasing demand for financial literacy and digital skills. In such a digital economy, embracing technology and upskilling employees remains a crucial way for SMEs to thrive. And with Pulse, businesses can invest in building the right digital infrastructure to unlock new growth and innovation opportunities.
Unveiling Hidden Gems in Your Income Statement
It is simple to overlook hidden patterns when focusing only on ordinary financial metrics. Now, let’s have a look at several key but frequently overlooked metrics and how they can help with strategic improvement.
Key Metrics You Should Be Tracking
While metrics like revenue, cost of goods sold (COGS), and net income are fundamental, the real insights often lie in lesser-known indicators. Here’s a breakdown of some key metrics:
| Metric | What It Tells You |
| Gross Margin Percentage | Measures production efficiency. A high margin shows you’re retaining a significant portion of revenue after accounting for production costs. |
| Operating Margin | Also known as Return on Sales. It exhibits the part of income left subsequent to covering the working costs, demonstrating functional productivity. |
| EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortisation | An intermediary for income that spotlights core business productivity, permitting examination inside enterprises. |
| Return on Assets (ROA) | Shows how proficiently you are using resources to produce benefits. A high ROA shows proficient resource use, while a low ROA could flag underperformance. |
| Return on Equity (ROE) | Assesses benefit compared with investors’ value. High ROE shows you’re utilising value really to produce benefits for investors. |
Understanding the Key Metrics in Practice
1. Gross Margin Percentage
It is a measure of how productive the business is at raising revenue after subtracting the production costs.
- Example: Consider a smartphone manufacturer. The direct costs include components like the screen, battery, and wages of factory workers. Once these costs are subtracted, the remaining income reflects the business’s profit. A high gross margin suggests better cost control and efficient operations, allowing the company to reinvest in growth or pay dividends.
2. Operating Margin
Operating margin, or return on sales, shows the company’s ability to contain operating expenses over and above production cost.
- Example: In restaurant companies with a high operating margin, their supply chain and labour costs are optimised, leaving larger amounts of revenue after operational expenses.
3. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation)
EBITDA is a non-operating expense that essentially detracts from core business profit but is helpful in presenting core business profitability. It is a powerful tool for comparing the operational performance of companies in the same industry.
- Example: If a retail chain retains a high EBITDA value with loan repayments and depreciation in its transactions, it still holds strong operational performance.
4. Return on Assets (ROA)
ROA is the measure of the efficiency of a business using the assets to generate revenues. The higher your ROA, the better you are at using your assets.
- Example: A logistics company that uses its fleet with a high ROA would use efficient asset utilisation to spend less time sitting in the depot and to deliver as much as possible.
5. Return on Equity (ROE)
ROE highlights how well a business uses shareholder investments to generate profits. A high ROE is a sign of efficient capital use.
- Example: A technology startup with a high ROE is delivering strong returns on the initial investments made by shareholders, reflecting the successful use of its capital.
Case Studies: How Metrics Drive Business Success
In this case study, two SMEs in the retail sector—Company A and Company B—adopt different approaches to improve profitability:
- Company A focuses on maximising its Gross Margin Percentage by controlling production costs, resulting in a 10% increase in net profits and a 15% rise in customer retention. Their strategy allows them to reinvest in growth without raising prices.
- Company B prioritises operational efficiency, improving its Operating Margin from 12% to 18%. By cutting operational costs, they saved 20% annually and successfully expanded to new locations with minimal overhead increases.
Both companies demonstrate how focusing on different financial metrics—gross margin or operating margin—can drive profitability and business growth, offering valuable lessons for SMEs.
Practical Tips for SMEs to Leverage These Metrics
To harness the power of these financial metrics, consider these practical steps:
- Conduct Regular Performance Reviews: Analyse both common and uncommon metrics to track performance trends and identify areas for improvement.
- Benchmark Against Competitors: Compare your financial metrics to industry benchmarks. Many tools, including Pulse, offer insights into how you stack up against competitors.
- Embrace Technology: Leverage financial management platforms like Pulse for real-time data analytics, streamlining financial reporting, and empowering data-driven decision-making.
- Seek Professional Advice: Financial experts can provide fresh perspectives and help interpret complex metrics, revealing untapped growth opportunities.
Utilising Pulse for financial insight is a game-changer. Our real-time data analytics capabilities enable proactive decision-making and an agile response to market changes.
Conclusion
Small businesses should look more closely at their income statements to find valuable insights, using tools like Pulse to analye their financial data.
Besides revenue and expenses, they are key metrics that open deeper understanding and actionable insights into your company’s financial performance. In the hands of these insights and with their implementation into economic strategies, SMEs are granted avenues for growth, optimising resource allocation, and facing challenges with confidence in the ever-changing marketplace.
Contact our team today at info@mypulse.io to discover how Pulse can help with sustainable growth and profitability. Embrace the proactive approach to financial management, continuously refining your strategies based on data-driven insights to stay ahead in today’s dynamic business landscape.
