30 May 2023
How well do you know your business? Do you truly know where your profits are coming from? Almost all companies will have specific services or products that generate significantly more profit than others. Getting a good perspective on this can save you time in the long run, maximise your value, and make all the difference in those make-or-break moments. So, what parts of your business are profitable, and how can you maximise your profits?
Unfortunately, there’s no formula or test to identify exactly where your profits are coming from. However, there are things you can do to give you the best understanding of what products or services are the most profitable for your business and maximise your profits. Once you know what you do that brings in the most profits, you can focus more of your energy on those areas.
Generally speaking, businesses will measure the profitability of a product/service based on gross profit. In doing this, likely, they will only take into account the direct costs that vary depending on how much they sell (like the cost of the raw materials or staff hours spent on a job). They then might allocate a portion of the fixed costs (those that remain the same regardless of sales) like rent to each product or service.
Here’s the thing: many don’t account for the fixed costs at all when looking at product/service profitability. If you analyse expenses, you’ll probably find nothing is truly fixed. Different products or services may have more or less of an influence on these costs.
For example, if you outsourced some of your work, it may mean you can move to a smaller office that would cost half as much to rent. So, how is ‘fixed’ is that rent cost? Sometimes, doing more doesn’t equal more profit.
A common example of this would be client communication which is not charged. Taking time out for a call or an in-person meeting takes time away from your business, therefore affecting the revenue you could be bringing in.
If you monitor these sorts of costs, you can increase your profitability by tagging these into the services you provide, or at least account for them and know where you may be impacting the amount of profit you’re generating.
Profitable businesses rarely have cause to investigate what exactly is bringing in the revenue. It’s easy to assume that whatever you’re doing is working, right?
If the market average is 40% profit, and your business is bringing in 50%, you could assume that your business is performing incredibly well. However, with a bit of investigation, you might find that by removing a product or service (or slightly changing how you run things) you could be bringing in 60%, with the same amount of effort.
Is 20% profit good? How about 30% or 40%? It all comes down to the story behind your numbers. Everyone wants a quick fix, but the truth is, it’s not always that easy. However, you don’t have to do it alone…
If you want some help with understanding how to maximise your profits, and where your profits are coming from, we can help! We’ll work with you to identify the drivers of growth in your business so you can get back to the parts of your business that you love.