What are your numbers = profit & success

by: Kim Throndson

July 22, 2025

As a finance manager and controller I viewed the enterprise as a series of numbers, and for good reason.  At the end of the day business owners and business managers want to be profitable and successful.  Key elements of a business are quantified into numbers to monitor for success.   Business owners and manager need to understand what they are and how they connect.

Your business or business unit’s activities convert to three sets of numbers:

-            Revenue

-            Variable Costs

-            Fixed Costs

A.      Revenue

Your enterprise or business unit is selling a product or service, or both, to your customers.  You charge the customer for this product or service.  The totals of all sales equal the revenue. 

Not as simple as you think.  Some things to consider:

-            Are you charging for all the sales?

-            Are you tracking all the sales in your accounting or CRM system?  (see blog post 5 things to be sucessful)

-            Are you separating different sales streams.  For example a salon has sales from hair cuts, colors, product sales, and maybe spa sales.   It is important to have the sales steams separated because the costs are different.  (see below)

B.       Variable Costs

As a business owner or manager you know it costs money to create the products and services you sell.  The bills keep coming in, so you know it costs money.  

Costs that are directly involved in making the product or service and  fluctuate with sales are called variable costs.

For example, a wine store has to purchase wine to sell (inventory).  A salon has to hire and pay a stylist to cut hair (direct labour).  A computer repair company has to buy parts for a job (materials). 

If the wine store has a sale for a wedding, then  it needs to purchase product to fulfill the wedding order.   So the amount of wine it purchase is directly related to that sale.

CONNECTION 1:  Revenue  drives  amount of variable costs.

For example, you  don’t want to hire 5 stylist and hope the sales come in.  You have bookings for 3 stylists so you pay 3 stylists.

CONNECTION 2:  A-B = gross profit

The amount left after you pay variable costs is called gross profit.

BUSINESS MANAGERS:  critical function head office may use gross profit to measure your efficiency and effectiveness.  Head office may even set a gross profit number you need to achieve to get a bonus.

When determining your prices, ensure that you have a surplus after covering the variable costs.   In finance it is called margin.   So if wine costs $16 a bottle you do not want to sell it for $16 a bottle.  You want to mark it up so you have money left over to pay fixed costs (see below) and make a profit.  This is called Profit Margin.

CONNECTION 3:  Revenue x mark up covers costs

C.      Fixed Costs

At the end of the day, the bills keep coming.  Some costs are paid regardless if you sell anything.  Rent, Insurance, some administrative costs like legal fees, or salaries are examples of fixed costs. 

So it is not enough for sales to cover variable cost. Revenues also need to cover fixed costs. 

Variable costs are easier to define than fixed costs.  For fixed costs:

-            Make sure you define and know your fixed costs on a monthly basis.

-            Understand the contracts and dates these fixed costs cover (ie rent, insurance).

-            Business Managers – tricker as you may have no control over your fixed costs.  They may be set by head office.  Ask for the details and numbers otherwise you are trying to operate revenue and variable costs in the dark.

CONNECTION 4:  Revenue – Variable cover Fixed

D.      Operating Income/loss

The amount of money ($$) remaining after the fixed costs are paid equals the operating income or loss.  If as a business owner or manager you are seeing a loss, you need review the  above and make adjustments. 

Know these key numbers, monthly, weekly, daily because the sooner you make changes the faster things will improve.   

CONNECTION 5:  Manage revenue and costs = success & profit

SUMMARY:

Know these key numbers:

Revenue

Margin

Variable costs

Fixed Costs

Operating Income/loss

They connect like a tree with roots, branches, and leaves:

CONNECTION 1:  Revenue  drives  amount of variable costs.

CONNECTION 2:  Revenue - Variable Costs = gross profit

CONNECTION 3:   Revenue x mark up covers costs

CONNECTION 4:  Revenue – Variable cover Fixed

CONNECTION 5:  Manage revenue and costs = success & profit