Determining whether you’re running a profitable business or not can be harder than you might think. Just because you’re making sales doesn’t necessarily mean that you’re actually earning money. You’ll need to perform a profitability analysis in order to determine if you’re actually making money with your business and by figuring out your profit margin.
You should start with a cost analysis. This can be configured in your bookkeeping if it’s efficient and up to date. Figure out how much it costs to produce your product or provide your service. The amount of money it costs you to serve your customers is very important, and will play an enormous role in the price that you set or decide whether you should sell it at all! Speaking of price, you’ll need to ensure that you set an appropriate one for your product or service, based on the market. This requires doing a competitive analysis. The difference between these is your gross profit. Gross profit is the amount you have to run the business to retain as net profit.
Advertising is another huge consideration in your profitability analysis. What methods are you employing to get your product or service in front of your customers? Are those methods working? How much does your marketing cost, and are you building that cost into the price offered to your customers? Our clients work to develop marketing and advertising goals into each campaign in the marketing plan, and evaluate return on investment (ROI) to decide whether to keep or abort the program next time.
Determining profitability within a business requires much more than accurate bookkeeping. It requires that you know your profit margin for products and services on offer, that you know the effectiveness and cost of your marketing methods, and that you truly understand the costs of doing business. The accuracy of your bookkeeping is important when it comes to performing a profitability analysis. With the information derived from an accurate profitability analysis, you can begin growing profitability and success.
If you aren’t sure how to conduct your own strategic analysis, hiring an expert consultant is the best way forward. Ensure that the consultant you choose is familiar with your industry, and that you can provide him or her with the required information (profit margin per product/service, marketing costs, etc.), and you’ll gain an invaluable ally. If you don’t have those required pieces, the scope of your consulting needs to include them, for sure!
Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).