How to Analyze Your Profits
Given a tough economic climate many small business owners are happy just making a profit - any profit. Satisfied that money is coming through the door, it's all too easy to be lulled into a false sense of security that, once profitable, the business will just keep making money.
This can be a big mistake. It's not enough to merely make a profit - you must manage your business so that it remains profitable. This can take a little time and forward planning - but without this process, you could jeopardize the stability of your business in the future.
Analyzing your profit base allows you to see which parts of your business are contributing to the bottom line and which are not.
It also helps you to decide which lines of business are likely to deliver profits in the future and, ipso facto, which areas of the business warrant further investment. But before you can start analyzing profits, you need to look at likely future sales, as well as your ongoing budget.
The first step in the profit analysis process is working out your sales projections. This starts by ensuring you have the right record keeping systems in place so that you can easily see which areas of your business deliver the strongest sales.
Make sure you keep immaculate invoicing records - it's also a good idea to keep a sales journal, a book that records all sales on either a daily, weekly or monthly basis, depending on the nature of your business.
When you know which areas of your business deliver the strongest sales, you can start working out future sales projections.
If you have new products or services for which it's tricky to work out future sales it's worth playing with multiple sales scenarios around low, average and strong sales. This ensures you're prepared if the product's sales fall below expectations.
Once sales projections are in place you can begin preparing your budget. Remember to align expenses with likely sales - and don't take expense figures at face value - see where you can reduce costs and cut out expenses that don't directly contribute to profitability.
It's also a good idea to benchmark your expenses against those of your competitors'. Your industry association should be able to provide you with market data about how much money other companies in your industry spend on standard budget items such as marketing, rent and team members.
Leveraging profit information
Sales projections and budgets are in place - now it's time to start playing with profits. Work out the profit margin for each of your business lines and think about investing in those that have the highest margins or the most potential for growth.
Also consider getting out of products and services that are not adding real value to your company.
Finally, keep in mind that cash is king. It's very important to understand (and plan for) timing differences between cash and profit flows - they're not the same thing. Your business can be showing a profit but be short on cash from time to time, and its cash that keeps the business viable because you need to be able to keep up your payments on stock, wages and so on. To keep control over this critical aspect of your business you really need a regular cash flow forecast. We'd be happy to advise on this. We also provide a service called Targeting Business Results that will help you analyze your profits and get you on the right track for maintaining profitability.