Often the only test business owners use to determine if they are making money is having enough to pay the bills with a bit left over. Is a P&L with positive net income all you need?
Understanding your company’s overall profitability and how each product/product line and service contributes to the overall is essential. Take a closer look; there may be things you could do to improve your bottom line. And, unless you take the time examine your profitability, you may have a problem and not even know it.
One or more product/service offerings may be eroding your profitability.
Have you noticed that there is not quite as much left over each month after all the bills are paid, even when total sales dollars seem stable? Analysis may reveal that your pricing in some or all areas hasn’t kept pace with costs.
Or, costs may have been overlooked or underestimated when you last calculated cost of goods sold. It is common to find that a particular product or service takes more staff time than originally thought, driving up costs. Another easy-to-overlook culprit is rising cost related to products, shipping or both. Could your business be experiencing losses due to spoilage or some other leakage?
You may be missing early warning signs that competition has increased.
Often customers’ behavior is a good barometer of a changing competitive landscape. Significantly higher than expected sales may result if your prices lag behind the market price. Slower sales may occur when the competition has stepped up efforts or a new player or product has entered the field.
To know what action to take, the first step is always to uncover any issues. I’ve written a handy step-by-step guide to this process, which you can download at http://www.breitnerandassociates.com/PDF/Getandkeepyourbusinessontrack.pdf.
Although this process may initially seem complicated, each time you repeat it, it will be significantly easier. If your market is mature and stable, annually is generally often enough. In more dynamic markets, increase the frequency. Be sure to write down any assumptions that you make and review them each time to ensure they are valid.
Since 1991, Laurie Breitner has assisted organizations with operational improvement, organizational development and strategic planning. Learn more at http://www.breitnerandassociates.com.