Last time, we talked about the importance of knowing profitability by customer, but what about the products and\/or services you sell?\u00a0 Do you know which lines of business are the most profitable and which are the least?\u00a0 You may think you know where your profits are coming from, but do you really?\u00a0 Are you sure?\u00a0 For more on this, please read below.<\/p>\n
At least once a year, it\u2019s a good idea to put your lines of business under the microscope to confirm that they are all making the profit contributions you think they are.\u00a0 Even if you\u2019ve done this at some point in the past, it\u2019s still a good idea to do it again.\u00a0 After all, things change.\u00a0 You may have changed your pricing strategy or your cost structure may have changed or the buying patterns of your customers may have changed . . . any one of those changes could seriously impact the profitability of one, or several, or all your lines of business.<\/p>\n
To do this analysis you\u2019ll have to know (as you should) the variable costs (those costs, like labor and materials, that go up and down as sales rise and fall) that go into each product or service you offer.\u00a0 Be careful to include all your variable costs, not just labor and materials.\u00a0 For instance, if you pay sales commissions, those should be included.\u00a0 And you\u2019ll have to know (as you should) what gross profit margin (sales revenue less variable costs) you need to cover your overhead and still produce an acceptable net profit.<\/p>\n
Ideally, your Profit & Loss Statements are formatted so that you\u2019re looking at gross profit by line of business each month.\u00a0 Unfortunately, a lot of small business P&Ls (and I\u2019ve seen a lot of them) dump sales revenue from all lines of business into one bucket making it impossible to discern what\u2019s making money and what\u2019s not.\u00a0 In those cases, the owner\/operator is depending on instinct or anecdotal evidence to decide where the money is coming from . . . not very dependable sources of business intelligence.<\/p>\n
Knowing which lines of business turn an acceptable profit and which do not is critical to pricing and sales strategies.\u00a0 That\u2019s not to say that you should automatically drop a line that\u2019s unprofitable.\u00a0 If you\u2019re using a so-called \u201closs leader\u201d strategy . . . offering one product or service at little or no profit in order to stimulate your customers to buy your profitable lines . . . then it\u2019s OK.\u00a0 But if you\u2019re losing money on a line without knowing it or intending to, that\u2019s a problem.<\/p>\n
Understanding your company\u2019s profitability by line of business is key to most of your important decision-making.\u00a0 If you struggle with knowing how to do it or where to start, call me.\u00a0 We should talk.<\/p>\n","protected":false},"excerpt":{"rendered":"
Last time, we talked about the importance of knowing profitability by customer, but what about the products and\/or services you sell?\u00a0 Do you know which lines of business are the most profitable and which are the least?\u00a0 You may think you know where your profits are coming from, but do you really?\u00a0 Are you sure?\u00a0<\/p>\n