The profitability section measures whether the trends in profit are favorable for the company. Your performance review will take a look at your sales and your expenses and identify the causes of profit fluctuations in your company, and predict whether your profitability will increase or decrease in future periods according to current trends. The review will look at “vital statistics” and compare them to other organizations to find out ways of improving profitability. Finally, the review will even create personalized suggestions and strategies to increase long-run profitability.
Here are some critical measurements, which are analyzed in your performance review:
- Gross Profit Margin= Gross Profit / Sales: This number indicates the percentage of sales revenue that is not paid out in direct costs (costs of sales). It is an important statistic that can be used in business planning because it indicates how many cents of gross profit can be generated by each dollar of future sales. Higher is normally better (the company is more efficient).
- Net Profit Margin= Adjusted Net Profit before Taxes / Sales: This is an important metric. In fact, over time, it is one of the more important barometers that we look at. It measures how many cents of profit the company is generating for every dollar it sells. Track it carefully against industry competitors. This is a very important number in preparing forecasts. The higher the better.
- Advertising/Rent/G&A Payroll/Total Payroll to Sales: These figures show the expenses of each category as a percentage of sales.