Most business owners and even accounting people think that the accounting function is to create Financial Statements and to do their taxes. While these are important they should not be the primary reason for your accounting function. The real reason the accounting function exists is to get information to manage and grow your business. Do you have the information you need to manage and grow your business?

There are five essential questions every business must be able to answer:

#1 - What is my product (service) mix and what are the margins and cost of providing these products/services?

Here is the answer to question #1. Can you answer the rest?

What are your “Product Margins”? What is Margin, also referred to as Gross Profit Margin?  Let us define a few terms and show what they are and how to calculate them.

“Product” - Anything you sell or provide as a service such as Cars, clothing, office supplies - or pool service monthly, pool clean up one time

“Mark up”  - The amount you charge over the cost you paid for the product - hence mark up such as office desk you paid 125.00 for and you want to make 100.00 profit on: 

$125.00 + 100.00 = $225.00  Cost + Mark up = Sales Price

The Mark up in dollars is $100.00.

This is also the Gross Profit in dollars - $100.00.

“Margin”  - In margins we are talking about % of mark up or gross profit margin - here is how it works

Cost = $125.00

Mark up = $100.00

Sales Price = $225.00

The mark up percentage is calculated by dividing the mark up amount by the cost amount.

100.00  / 125.00  =  .8 or 80% mark up

The gross profit margin is calculated by dividing the gross profit amount by the sales price.

100.00 / 225.00  =   .4444 or 44.44% 

While the dollar amount is the same, the percentage changes because of the number it is calculated by.

#2 - What does it cost to acquire a new customer (in each marketing method)?

#3 - What is the value of the first sale to a new customer?

#4 - What is the lifetime value of a customer?

#5 - What does it cost me to open my doors each day (break even)?

How many can you answer?

Michael Row (Mr. Quickbooks) shows you how to find the answers to these 5 questions so you have better information to make better decisions.