Assessing your profitability
If you were starting an accounting or finance business, you could assess your company’s profitability on your own. But others might need a little help. Most entrepreneurs have significantly more practical knowledge about their own field than about number-crunching.
That’s not usually a problem: you can retain subject matter experts to advise you on mission-critical issues. Yet it’s always a good idea to have some of the basic concepts of profitability at your command. If nothing else, small business owners make better decisions when they have access to current, salient information about the company’s always-fluctuating financial condition. Especially as it relates to profitability.
Here are a few tips that can help you gain a clear-headed picture of how your enterprise is doing.
DIY financial software can only do so much. Most commercially available packages can help you sort and track your basic numbers. But to get a clear picture of the company’s financial health, and develop strategies for growth, you’ll have to look more closely. Where can you afford to cut back expenses without disrupting the operations that determine your profitability? Do you see any patterns in the way your receivables fluctuate? How sustainable is your current cash flow? What’s the smartest allocation of your short-term marketing dollars? How about long-term? Here’s one solution to consider: Hire a trained bookkeeper, even if only part-time, to keep your financial records current and consistent—so you can access the data you really need to guide your decisions. Unless accounting and finance are your thing, you’re probably better off delegating that function so you can free up your time to run the business.
Look beyond the bottom line. Unless your business depends on just one offering, the more meaningful and actionable insights come from figuring out profitability for each product or service you sell. Which ones are doing better over time? That information will help guide your marketing and production decisions. Which ones show signs of stagnation? Are they worth reimagining, reintroducing or retiring? That line of inquiry can lead you to explore more efficient ways to operate. Are any product performance trends tied to a specific client? That information can reveal where you might want to invest in a little extra retention activity. The more you analyze how each component performs, the more coherent your next steps will be.
Income is not the best indicator of profitability. Your sales numbers might be through the roof, but your profitability doesn’t necessarily follow. If your production or operational costs are climbing, or you have a predictable financial hit on the horizon (a tax bill, for example, or a needed equipment upgrade), they wouldn’t necessarily show on your radar if you’re blinded by last quarter’s amazing gross revenue. Your least profitable offering might be selling out while your sales of your most profitable item are tanking. If you were focusing exclusively on gross revenue, you might not notice key trends like these. By all means, celebrate strong sales performance. But keep that data in perspective. When you focus more on profitability, you can allocate resources as needed to shore up stale marketing, inefficient production or other processes that need to be tweaked.
Profitability is a mindset, and focusing on it can help you foresee and solve for minor issues while they’re still manageable. The small business specialists at Pango Financial can help you keep your eye on the profitability prize. If your own profitability equation points toward a need for innovative financing solutions, contact us at 1-855-WHY-PANGO (1-855-949-7264) to learn more.