When you’re reviewing your various financial statements, one of the first things you’ll want to do is a trend analysis. This helps you identify any peaks, troughs, patterns and anomalies across sales and expenses.

If you were to analyze monthly sales over the past few years, you might find that seasonal demand has a significant impact on product sales. With this knowledge, you could then prepare ahead of time by planning product-specific marketing campaigns for each relevant season. This would also allow you to prepare your inventory levels, to ensure you have enough stock to take full advantage of these sudden increases in demand.

You might also conduct this type of trend analysis across your business’s quarterly expenses, to help you spot any increases in operational costs. Some of these costs might creep up very gradually, so they can be difficult to notice and mitigate unless they’re being tracked. Meanwhile, some other expenses might spike up more drastically, and by understanding when they typically do, you’ll be better prepared to meet these costs without impacting your cash flow.
As well as keeping track of any noticeable trends over time, another important aspect of running a business is guaranteeing and improving profitability. For this reason, running a margin analysis is key. By analyzing your profit margins across various sales channels, you can gain deeper insights into which ones require more of your time and resources.
Understanding channel profitability is especially important in today’s digital world. Shoppers now expect seamless, omnichannel experiences, that allow them to interact with you through their preferred channels. To give shoppers what they want, it can be tempting for a business to offer as many channels as possible, even if some of those channels are significantly less profitable than others.

Making regular comparisons can help put decisions like this into perspective, allowing the business to focus on maximizing the performance of its most efficient and profitable channels.
Now, it’s not just your channel profitability that will benefit from margin analysis. You should also work to identify which products have the highest margins and try to determine why.
Maybe you’ve positioned a certain product as being a 'premium’ or ‘luxury’ good, which justifies a higher price point and sets it apart from other products. Or, instead of a high price point, it could be that the costs associated with a particular product are low, like the price you pay to buy that product from your supplier. Once you understand why a product is profitable, you might consider making similar alterations to your less profitable ones and seeing if this helps increase their margins.
You might also decide to put more resources towards advertising for profitable goods, to raise your average margins and increase your total profits. If you don’t have any money to spare for this, then it might be worth freeing up some cash by reducing the amount you spend on advertising your least profitable goods.
It's often a good idea to create some kind of system that helps you rank your product mix according to profitability, and then track things like reducing sales volumes or high rates of shopper returns. This can help you spot any issues early on, and determine which products are continuing to be profitable, and which are not.
Along with analyzing trends and margins, your business could also heavily benefit from undergoing a routine cost analysis, which identifies the levels of variable and fixed costs it incurs across channels.
Variable costs, also known as the ‘Cost of Goods Sold’, or ‘COGS’, are expenses that rise and fall in direct proportion to sales. So, as an example, a shoe retailer’s variable cost would be the amount it has paid the manufacturer for any shoes the business has sold.
Analyzing variable costs can help you identify opportunities to reduce them, like negotiating with your suppliers or purchasing in bulk for discounted prices. You might also want to think about reducing the number of products, or ‘SKUs’, you offer, and instead, prioritize selling a smaller range of products in higher volumes.
This tactic can significantly reduce your inventory costs, but it does ultimately depend on how your brand positions itself in the market. If your brand is known for its extensive range of products - and if this is a significant pull factor for audiences - then reducing it might not be the best move.
Unlike variable costs, fixed costs aren’t directly linked to sales volume. For example, fixed costs often include expenses like marketing spend, as well as operational costs, like salaries, rent, and utility bills. The good news is that modern-day technology makes tracking and measuring your marketing costs relatively easy, so you should have access to information that can help you optimize these. Operational costs, however, are typically situational and unique to each business, so it can be more difficult to understand why these expenses seem to be inflating over time.

For example, some businesses might find that a particular process adds a level of complexity that requires more administrative help and ultimately increases its overheads. But this won’t necessarily be the case for every business, so you might want to encourage the wider organization to look for opportunities to streamline workflows or reduce waste.

Optimizing Financial Health