Financial growth drivers are important factors that any successful company ought to monitor closely. More specifically, analysists use such measures to manage development, while also obtaining insight into how an entity is likely to perform in the future. In most cases, the success of a business depends largely on how financial growth drivers are studied and analyzed. The impact they have on the bottom line affirms their importance to investors for ascertaining the health of a business. Mastering these key terms won’t take much time and effort and will allow you to quickly start performing base-line financial analysis and preparing simple predictive models.
The 6 Key Business Growth Drivers
Variable and Fixed Costs
Variable costs refer to the day-to-day expenses that a company or business incurs in producing goods and rendering services. They are some of the most important factors that an entity should control by keeping low in order to strengthen profit metrics. Such costs include raw materials, labor, production supplies, delivery costs, and credit card fees.
Variable costs can fluctuate significantly. Still, it is important to find a constant amount required to produce a single unit or support the provision of a given service. For instance, it would be wise to stick with a low-cost raw material supplier to curtail production costs. Any entity that can reduce this rate is always sure to bolster its profitability.
Fixed costs refer to the expenses that are incurred regardless of the number of goods produced or services rendered. For example, rent and mortgage, salaries, and insurance, are all fixed costs that an entity must pay. In addition, costs incurred for the one-time purchase of new tools or machinery are also accounted under this metric.
It isn’t easy to adjust fixed costs. However, for a business to achieve optimum returns, it must explore money-saving solutions that can help offset expenses.
Assets are the items businesses use to generate the goods and services that keep a company in operation. On the one hand, these could be fixed assets, such as land, factories, and machines, that stay in our possession for the long run. On the other, they could be current assets such as inventory and accounts receivable that have a high turnover rate.
Companies often acquire assets to drive up production. Similarly, they may purchase them specifically with reselling purposes in mind. When it comes to investing in assets there are certain considerations to take into account. Thus, a company should only buy assets with high production capacity or such that can be offloaded at a significant profit.
In addition, the cost of assets will determine much of the investment’s rate of return. For example, investing in a low-cost, sub-standard asset could prove a strategic mistake. As repair and maintenance costs start to increase, dealing blows to profit margins. At the same time, paying a premium for an asset could make it extremely difficult to recoup later on.
Sales volume is the summary of all production units sold by a business. Contrary to perception, increasing sales volume does not always translate to more free cash flow to the firm. In fact, businesses need to strike a balance between the volume of sales and the costs incurred during production and distribution.
It is important to ensure that an increase in sales volume does not lead to an increase in expenditures. While expenses will always go up as more goods are produced and sold, this should happen in a way that does not affect profit margins.
Furthermore, if sales are not there, it might be wise to start examining other profit drivers if a business is to remain afloat.
Pricing is arguably one of the most crucial financial growth drivers. Hence, how well a business prices its goods and services determines whether it can fuel demand and drive sales. Crucially, if pricing is to remain a growth driver, a company must make sure its prices don’t repel customers nor suppress profit margins.
Moreover, a business cannot continue selling at the same price while absorbing increased costs. A spike in raw materials or inflation levels oftentimes calls for prices to be readjusted so as to offset increased costs. Therefore, it is important to study the market and ascertain the right time to hike prices.
As a result, we should set prices in a way that can cover all expenses incurred during production. Pricing also depends a great deal on the quality of goods or services offered. With superior quality products, a business can take the risk of hiking prices without losing customers.
However, any price increase should consider what other peers are offering and the quality of alternatives on the market. In competitive industries, it can be challenging to carry out increases. Conversely, it is always important to consider the number of customers one is likely to lose in such a scenario.
Finally, profit is another important financial factor that any business or company needs to analyze to be successful. This is the amount of money an entity makes after substracting production expenses from sales revenues.
In most cases, it is best to calculate the gross margin to gauge a business’s performance. We obtain Gross Margin by dividing gross profit by the number of sales. Gross profit is the difference between the sales generated and the costs incurred.
Gross Margin = Gross Profit /Sales
For example, if the gross margin is 65%, this would mean that for every $1 of sales produced, the business ends up making 65 cents in profit. This piece of information is indeed essential. It makes it easy to ascertain the pricing structure need to ensure that optimum profits are generated fo every dollar spent in the production and distribution of goods and services.
While there are various financial growth drivers to consider, it is important to prioritize the right factors on a case-by-case basis. Targeted analysis requires a solid grasp of the structure of a company. This includes knowledge of its profit and cost centers, its capital budgeting strategy, and a host of other factors. As a result, corporate finance professionals are always eager to upskill and fine-tune their tools. No matter if you’re just starting out, or if you have some working experience, our Corporate Finance Course will give you a competitive edge in the business world.
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