Bob Gauvreau (speaker) explains core elements of a business financial model and how they drive bottom-line performance. He defines three key components—revenue, variable costs (costs that scale with sales, typically a percent of revenue), and fixed costs (overhead that remains constant month-to-month)—then shows how gross profit and profit margins determine the number of units needed to reach break-even and beyond. The speaker stresses that understanding these elements is necessary to increase net profits and achieve business goals.
Questions this video answers
August 8, 2022
$1,000
50%
$500
Chapters
Successful businesses optimize their business for maximum financial performance. Optimizing business performance all starts with understanding how financial models work. There's three key elements inside a business to understand how to maximize the financial performance. The first is revenue. Obviously, revenue is generating all of the income for the business, whether it's selling a service or selling a good. The second is variable costs. So these are costs associated with delivering that service. Variable costs go up and down depending on how much your revenue is. So, for example, you're selling more items, your variable costs are going to continue to go up. They tend to also be a percentage of your revenue as well. The third element is fixed costs. So fixed costs are things like overhead, your rent. It's the same amount every single month. It doesn't really fluctuate unless you need more space. And it's going to be a fixed amount from month to month, year to year. Ultimately, you need to understand how this financial model works if you want to increase the bottom line performance of your business. Obviously, your fixed costs hopefully remain consistent from year to year, from month to month, without changing. If you want to increase your bottom line financial profits, what you need to do is understand what your gross profit is. For example, if you're selling an Item and it's $1,000 for that unit, but the cost of buying that unit up front is 50%, your profit margin is 50%. So if you're selling an item for $1,000, your profit is $500. You have to sell a certain number of those in order to cover all of your fixed costs. And that is called your break even point. So your break even point means your profit covers all of your fixed expenses. Ultimately, the goal of a business isn't to just break even, it's to ensure that you're creating more income than zero. Obviously, we have to do some sort of goal planning to ensure that whatever it is that your outcome is is attached to what you want your goals to be. So again, you're covering your fixed costs. The more profit you have in your business, the more bottom line income you have in your business. So without understanding the financial model of your business and how profit works on selling services or selling goods, you won't understand how you can maximize the key performance in your business.
