Business profitability can become a somewhat confusing topic.
If your business has money in the bank, that means you’re profitable, right?
Maybe, but maybe not.
To determine your profitability, we need to understand your business’s gross profit and net profit, all while analyzing your processes and overall costs of doing business.
Is all this making your head spin?!
Let me offer a simple guide to help you understand your business’s profitability and a few ideas on what to do if it isn’t. Let’s begin!
Is Your Business Profitable?
There is a simple equation to help you determine your profit, correct?
Revenue - Expenses = Gross Profit
Well, this formula can be helpful for you to review, but it’s missing key information that will help you determine if your business is actually profitable.
The answer to the equation above provides you with your gross profit. We need to understand your net profit to determine profitability.
Gross Profit - All the money from revenue minus expense
Net Profit - Your bottom line number that accurately reflects profitability
To understand your profitability picture fully, we need to understand your cost of goods sold, your business processes, as well as other factors. If you’re analyzing this data and aren’t seeing the numbers you were hoping for, there are strategic actions you can help to boost profitability.
Here are three things to consider if your business isn’t profitable.
3 Things to Consider If Your Business Isn’t Profitable
So, what if your business isn’t as profitable as you were hoping? What if you have more questions? Here, I offer three action items for you to consider when moving forward.
1. Perform a Profitability Analysis
It’s time to deep dive into your business financials to paint a clear picture of what’s going on. You’ll need to look through every area where the money comes in and out of your business.
Review the following:
Your gross revenue
Overhead costs
Cost of goods sold
Your business compared to the competition
And more
After you’ve reviewed all of these, you can look at the full picture to see where tweaks can be made to improve your numbers. I offer more in-depth insight into a profitability analysis here.
2. Perform a Management Analysis
Management analysis is the process of analyzing the systems and workflows in your business to find areas for improvement. Similar to the profitability analysis to review all of your financials, you’ll use the management analysis to review every aspect of how your business processes are functioning.
First, document every process in your business from the client’s first touch point to the very last. You’re looking for any areas of redundancy, inefficiencies, or where projects (or fulfillment) get stuck.
Here’s what to look for:
Can any part of the process be automated?
Is there a bottleneck in the process?
Is knowledge being shared among your team?
Making a few key tweaks can result in a big boost in effectiveness that will result in better business profits.
3. Find Financial Planning and Analysis Support
Finally, if you’re reading through all of this and your head is still spinning, it’s time to consider expert help. As a business owner, you wear a lot of hats and have to learn a lot about running a successful business. However, there is a time to DIY and a time to work with an expert. All the top entrepreneurs know when it’s time to outsource. The key to finding the right financial planning and analysis support is finding a company that you can trust.
Your Financial Planning and Analysis on the Seacoast
As a business consultant, I serve businesses in the Seacoast and across the US by helping them determine action steps towards reaching their profitability goals. As a business owner as well, I understand the hesitation in outsourcing a critical service such as this. I’m happy to schedule a complimentary consultation to simply meet and connect with you. You’re welcome to subscribe to my email community as well.
