Profit Quality is easily measured against plan and previous year results to quickly confirm whether current profits are better than plan and previous year results or not. Knowing the quality of your profits month-to-month is vital to both your near-term cash and profit management practices.
Failure to know the quality of your profits means you are making cash-impacting decisions for your business in the dark. Decisions made in the dark nearly always increase costs that drain cash reserves, causing you to make less money.
Overview
The ultimate measure of business performance is how well a business extracts profits from its sales through its operations. Measures, indicators, and metrics are how you confirm how well your business does this through your profit quality.
The quality of your profits matters because making money is hard to do. You make it more complicated than it already is when you run your business without having minimum sales and profit targets to be realized each month to establish what profit quality looks like:
When you confirm profit quality, you are confirming how your business is doing, while identifying where you are performing better or worse than your desired plan, utilize the following reporting tools:
- Sales Key Performance Indicators (KPI’s)
- Operation KPI’s
- Finance KPI’s
- Actual to Plan Variance Report
- Year-Over-Year Variance Report
- Thirteen Rolling Month Variance Report
Those who use management reports like those reflected here are very good at identifying where their business performing well and where they need to intervene to fix what’s not working. Small business owners who do this are those who consistently make more money than others because they know with certainty how their business earns a profit.