To Make Your Business More Profitable STOP Focusing only on the Top and Bottom Lines.
Do you look primarily at your revenue and net profit to assess how well your business is doing? If you do, you're not alone - many small business owners do the same. They have top and bottom lines that are positive and growing, so what's the problem? It's not a problem as much as it is a missed opportunity to make your business more profitable.
Let's Dig a Little Deeper
Do you know the profitability of the different products or services that you offer? Most small business owners I talk to assume they do. The reality, however, sometimes tells a different story. Many businesses have several products or services that are not as profitable as they believe, which can lead to a great deal of lost profit. Time and money are limited, so you want to invest them where you get the best return and knowing the profitability of each offering is critical to understand when making choices for the future.
When you focus only on revenue and net profit and you're making money, it's easy to assume that you have a profitable product range. However, it is quite likely that one or more of your products or services is either not profitable or much less profitable than other products. Wouldn't you rather allocate your time and money to those that are the strongest contributors?
Calculating Profitability by Product or Service
The only way to evaluate your products is to calculate the profitability of each - what your customer pays less the costs that go into producing it and the labour that goes into creating it. If the number is negative, you are losing money on every sale and you'll need to decide if you want to keep it or not. If the product is of strategic importance, you may decide to keep it as a loss leader. If it isn't, look at the price you charge and the costs that are associated with it - are there adjustments that can be made to make it profitable? If not, consider discontinuing the product and focusing on more profitable ones.
If you don't track revenue and expenses by product or service, you will struggle to calculate the profitability of each. It is well worth the effort to change how you collect data. You can easily configure your bookkeeping software to allow you to calculate product profitability at a click of a button. Ask your bookkeeper to help you to set it up.
Knowledge is Power
Even with the best concepts and products, many small businesses never achieve their success potential. Tracking and analyzing data at the product and service level can make a huge difference. Knowing which products and services are profitable allows you to make educated, data-driven decisions and focus your business planning more strategically.