Gross profit and gross margin are often neglected numbers in service-based businesses. These numbers are…
How to Identify Your Most Profitable Services for Growth
Most businesses sell more than one product or service, but equally most business owners have no idea which products or services are making the most profit.
Why? Because the accounting systems have been set up to provide financial information for calculating taxes and they haven’t been set up to provide good information for business management. When you know which lines of business are your most profitable and which are making the least amount of money, it makes it much easier to make decisions about what to promote in your marketing budget.
Three divisions, three very different results.
A good mate of mine has a part ownership in a business together with two other friends. As it happens, there are also three main streams of income into the business which are different services to different markets. Over the years, the owners have had heated discussions over which area is the most profitable. They had a fair idea of how much revenue each division made, but even that was a bit rough and ready.
With a few minor changes to the way their accounting system was set up, they were able to allocate all income and all costs against the three divisions and over a three-month period, the results were crystal clear. As it happened, one of the divisions was very profitable with high margins, one was doing ok with good margins whilst the other was actually losing them money; their variable costs exceeded the revenue.
With the facts before them, there was no longer any heated discussion. Instead, they had a good long talk about the business, and as the loss-making services were providing lead-in work to the profitable division, they chose to continue to provide those services. However, they did increase the prices and started looking for ways to provide the service more efficiently thus reducing their costs.
The next step they took was to seek more of the clients wanting the highly profitable services, and that is the only service they now actively promote. They don’t turn away the other work, but now they concentrate on the highly profitable work.
The result has been an exponential growth in the profits of the business, the owners no longer argue about what’s happening in the business, and they are focused on growing the business knowing exactly how each piece of their business fits into the overall profit position.
Easy to set up processes.
Most accounting systems have some form of tracking categories (Xero) or Jobs (MYOB) that will help to identify the figures for the different income streams. At worst, set up different account lines for each income stream and for each of their associated costs. This makes the reporting ugly, but with a bit of finessing in a spreadsheet, you can identify the same result.
The benefit of using something like tracking categories or jobs is the ability to pull out a profit and loss statement for each income stream very quickly with the push of a button.
Running your business without knowing how each income stream or service type or division is performing means poor decision-making as you just don’t have the right information to make the decision.
Knowing exactly how each is performing allows you to make decisions about whether to keep providing the lowest performing services or not and which services or client types to be promoting the most.
This also makes it much easier to be able to say no to a potential client if they only want your lowest performing service and you are at or close to capacity. Better to wait for another order for the higher performing service than waste time and energy on a low paying service.
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