Operating Profit Margin - dig past the financial activities

Operating profit is reported income after revenues and expenses for the company's normal operating business have been subtracted, but before factoring in the contributions of financial income, financial expenses, extraordinary items, and taxes. It differs from gross profit in that all the operating expenses such as legal and distribution expenses are included.

For the business founders and owners, operating profit represents what is available to them before a few financial items need to be paid out including preferred stock dividends and taxes. Generally though, ample operating profit shows that your company is either well run with the right amount of cost controls, or that competitive forces are weak against your offering. Strong operating profits also enable the use of capital to do more whether it is adding features to your software application or making you checking process more seamless.  Note: when looking at analytics for operating profit, it is important to keep in mind that this metric can fluctuate widely especially for companies impacted by seasonality.

Operating profit expressed as a percentage of net sales revenues is referred to as operating margin, a measurement for management’s efficiency and quality of a company’s activities against its competitors. If your business is going high volume and low cost, then operational margins should be on your list.  Note: this metric can be skewed by showing strong margins that came by taking on significant debt, which puts the business at risk.

Many analysts and business owners alike call operating profit among the key business metrics to evaluate a company’s performance.  Visualizations can be evaluated by looking a revenue next to operating profit or a trend line showing operating margin.

Letter to our customers

Dear Valued Customer,

Why Bimotics? Because Bimotics is a small company just like yours, working tirelessly to produce a product that will improve your business and how you think about your business.   We firmly believe that we provide an easy-to-use tool that can help you analyze, refine, and grow your business in a way you never before thought possible.

How does Bimotics do it? In the same way that you have a special skill, be it making the best cupcakes in town, tailoring the finest suit, or running a high tech distribution network, we have a special skill as well.  Your business is unique, and Bimotics is the unique solution to help you unlock your full potential. We have spent our entire careers figuring out how to bring you the best analytics solution as possible.

We have removed all the challenges that small businesses face when dealing with data through our a la carte menu of analytics.  We have made the analysis of your business as simple as picking items off a restaurant menu.  We have created a true self-service product.

Measure, monitor, and forecast your business at a glance.

Our skills are at your service.  We look forward to your Good to Know! moment.

Sincerely,

The Bimotics Team

5 Gross Margin metrics and how they matter

Profit and loss is reported in every business through the income statement.  It is here that profit metrics can be created which can help a company assess its health over time.  Bimotics makes this analysis easy.  Especially in the case small and medium sized businesses, gross profit and operating profit analysis can help determine whether a company is executing on their core activities and what their next steps should be.

For example, gross profit is used to understand gross margin. Over time, if gross margin decreases, that implies that production costs are rising faster than sales. This trend signals that the company will need to increase cost controls and/or look for options to improve sales. When working with companies, we  have seen it time and again -- investors get concerned when profit margins are too low, indicating key weakness in the business model.

There are different ways to learn from the gross margin metric and leverage the power of Bimotics.  Following are a few examples:

 

1. Gross margin by product/service line: This lets you see which products or services bring you the greatest profit per unit. This analysis helps you identify the level of impact your products have on the bottom line.  You can use this information to help you decide, for example, if a product line is worth developing or phasing out or what campaigns are needed to improve a product line’s performance.  

2. Overall gross margin over time: This lets you see how sales and costs impact a product over a period of time. Trends can be measured and predicted taking into account external factors such as inventory headwinds and internal factors such as cost of inventory storage. Controlling or counteracting these factors can keep margins at a healthy level.

3. Gross margin by team: This lets you see how different working teams within your organization manage sales and costs. Depending on the objective of each team, you can compare and learn how they managed resources to meet particular goals.  This metric is used for learning events.

4. Gross margin by customer type: This lets you see which kinds of customers are impacting your profit and suggest price points that each type of customer will be willing to pay. Use the metric to decide if and how a particular product should be introduced and marketed to a certain customer segment.

5. Gross margin planned vs. actual: This is a good benchmarking tool that helps you analyze how well actual business measured up to what was forecasted.  The difference between the two gives you a starting point on where to delve deeper into the factors that are really impacting your business.  What did you not take into consideration that you were supposed to?  Are you meeting your goals?

In summary, gross margin is a key profit metric that every business needs to understand and track because it illustrates the relationship of sales and costs and is impacted by many facets of your business ranging from team and operations, to customer and product.

Bimotics allows you to easily and meaningfully analyze gross margin, and help you to fine tune and grow your business

Visualizing profit and profit trends

In the previous blog, we discussed how profitability and long term value are the main goals for small and medium sized businesses.  With this in mind, the ability to analyze and understand your profit is growing increasingly important. With a little research, you will find a great variety of visualizations or charts for analyzing profit. Most may look “cool” but are not very easy to read or insightful.

At Bimotics, we recommend that when looking purely at profit over time, a line chart best displays profit trends.  A line chart is best suited for analyzing patterns over a time series. It helps you understand historical and current trends, seasonality, and repeatability.  It also provides support for comparison while evaluating your data against other variables such as product or service type, sales, store, geography, and customers.

 

A bar chart can also depict changes in profit over time, however according to Stephen Few, each bar chart should need to start at zero. Take the contrast such as a waterfall chart.

Although the details of revenue and costs are important and can be visualized in the chart above, this chart is confusing, requiring you to figure out its meaning. The chart expects you to do the subtraction of costs from revenue may miss suggest that profit is too small compared to profit.

Returning to the first line chart developed in Bimotics, you can see how choosing the right visualizations allow you to easily and quickly build meaningful comparisons that help you unlock the power of your data.  Comparing and forecasting have never been easier for your small and medium sized business.  

Startups vs Small Business: Bimotics Perspective

Every once in a while I come across blogs and articles on the difference between startups and small businesses. The distinction between the two is that a successful startup is expected to grow exponentially from small beginnings, to attract customers rapidly, and hopefully grow to serve a very large market.  Startups are therefore a much smaller set of small businesses. In contrast, small businesses typically have a viable business and customer base in place and their needs are slightly different as a result.  Bimotics has been evaluating and analyzing this dynamic and this is reflected in the operational and financial dashboards that Bimotics builds.

My first impression was that the dashboard of a startup and a small business would be the same-- the slope of lines and the amplitude of the y-axis on some of the charts would be able to share the same visualization framework. Is it not true that all businesses should grow?  The trajectory of a startup would just be steeper right? At their essence, don’t all businesses share similar foundational forces of accounting and operations?

While I’m not wrong, Neil Thanedar wrote in a 2012 Forbes article that specific focus of each business type would drive different analytics in a dashboard. He explains that small businesses are driven by profitability and stable long-term value, while startups are focused on top-end revenue and growth potential.  

Profit is basically calculated by subtracting Total Costs from Total Revenue. While Top-end Revenue is calculated by subtracting just Total Discounts and Returns from Total Revenue.

A small business focusing just on top-end revenue would be disastrous as it does not address the need for sustain long-term value. Profitability is a better analytic as it takes in account costs and gives a business owner indication of sustainability. As long as small business is making a profit, it will continue to survive.

Although cost is important when a startup in evaluating available runway, it is not used when focusing on how the business is performing.  Top-end revenue tells the founder what it takes to make sales. Against defined specific sales tactics, the founder evaluates what makes people buy and how to attract more sales. This insight is key for accelerated growth of a startup to capture that larger market potential.

Even amongst businesses of small size, it is important to understand how focus can drive different monitoring and analytical needs.  Although there are business fundamentals that all businesses need to adhere to, at the owner level, dashboards are not one-size fits all.

Bimotics is tailored to suit the needs and unlock the potential of companies from the emerging startup to the growing small and medium sized business.