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How to be sure you’re making money and keep some for yourself.

A simple way to ensure business profitability and healthy cash flow is to focus on what drives both.

• What drives revenue needs to be understood.
• How saleable is the product or service and what’s the market?
• What marketing is working and how much is it costing to acquire a customer?
• Is it profitable revenue?
• How does the true cost of delivering the product or service compare with the price? 
• Are customers returning and if not why not? 

One of the biggest missed opportunities we see in business reports is lumping all revenue into one account and not breaking it down into categories.  Breaking down, not only the revenue, but the costs associated with each revenue source, enables you to see clearly where you’re making and losing money.

Pricing of products and services is vital to profit.  To ensure profit it’s vital to know the true cost of the product or service and keep an eye on it, to avoid ‘margin squeeze’ i.e. allowing costs to rise without increasing prices and absorbing extra cost.    Market forces have an impact on pricing but it’s not viable to continually absorb cost increases without price increases.  It’s not always necessary to increase everything. 

Example: One client recently told us they hadn’t increased prices for years.  We did some analysis to find out what were their best selling products.  On each of these we agreed to a small increase with no resistance from customers.  A small regular price increase is much easier to achieve that irregular big ones.  Most customers expect a CPI increase and if it’s written into contracts, it’s much easier to achieve.

Costing of products and services is vital knowledge to work out gross profit.  Gross profit is the difference between revenue and costs and is an important benchmark.  Cost of products may include: the product, importing, freight, packaging, labour, warehouse, raw materials etc.

Cost of jobs may include: labour, materials, out of pocket expenses etc.  If gross profit is below expectations it may be necessary to assess how products and services are costed and acquired.

Example:  We had one client in a wholesale business whose packaging was a large portion of costs.  When we questioned their ability to negotiate a better price with the supplier, they said it wasn’t possible.   We did some shopping around and found a supplier who offered a 10% reduction.  The regular supplier soon agreed to a similar reduction.

Labour is another example of cost management on jobs.  It’s often the case where chargeable labour spends time doing non chargeable work such as admin.  If you take the number of people, and calculate the total hours spent on admin multiplied by their hourly charge out rate, it’s often the case that the cost of employing someone else to do it, is less than the missed income.

Overheads can get out of hand where there is no budgetary control.  Owners don’t always have time to keep an eye on what everyone is spending, or shop around for the best deal.  A budget can be a saver as well as keeping your banker happy.