Running a loss making business is easy, anyone can do it. Running a profitable business is much harder.
In order to make sure your business is profitable, you need to take care of several key areas.
Ensuring each of these areas are profitable will help the business to be profitable.
CUSTOMERS & JOBS
Ensuring that each customer and job you undertake is profitable will inevitably lead to your business being profitable. When you start analyzing each customer and job carefully you may realise that some customers are simply not profitable. These customers will need to be either turned into profitable ones or let go.
One way to make sure you have profitable customers is to make sure your pricing is correct and be careful what discounts you give them.
When looking at your pricing you need to take three things into consideration:
PRODUCT
It goes without saying that you should sell products for more than you buy them, but not all products will give you the same level of profit. This profit on products is called your margin and each product you sell gives a contribution to your overheads. Once the margin is more than the overhead then you are profitable.
If you had two products – Product A and Product B and the margin on product A was low and the margin on product B was high, then it is possible with the same levels of sales you could either be in profit or not.
This will be the result of the mix of product you sell. Get this mix wrong and you could make a loss despite having good sales.
OVERHEADS
Overheads are your fixed costs of the business.
They should remain fairly constant but inevitably, as your business grows, these grow too. It is much easier to increase profit by reducing overheads than it is to sell more. After all, a pound saved is worth more than a pound sold because you are only making a margin on the pound sold.
So regularly review your overheads to ensure you are not spending unnecessarily. Ask yourself, “Do I need this cost in my business or is there another way/cheaper alternative”.
Turnover is Vanity but profit is sanity
How often have you looked at your sales and thought – “We have had a good month”. It’s not till you look at your profit that you really know if that’s true.
Many businesses do not have access to a monthly profit and loss.
If your business s is one of them, then give us a call because, with modern bookkeeping software it’s never been easier.
