Am I Making a Profit
How many of you have heard the old saying “We are going to lose money on every sale, but we will make it up in volume”. Surprisingly this is the case more often than many of us would like to admit. It’s not that we purposely set our prices below our cost. Most often it’s because we do not know what our true costs are. Consider some of the following ideas, then look at your business and decide whether you are as profitable as you think.
Personal Profitability Many business owners do not “charge” for or figure their time into the cost of their goods or services. To be truly profitable it is important to understand your own Personal Rate of Return. Your Personal Rate of Return is your annual income divided by 2000. Once you know you’re your personal rate of return set that cost into the cost of your product, and more importantly perform only those tasks for which you would pay someone else your rate (or more). Eliminate or delegate the rest.
People Profitability As our business grows we need to add employees. The payroll these employees make will generally represent the largest expense item for most businesses. As the business changes, it is important to stay on top of these expense items. Many owners are too busy developing new products, talking with customers, networking for new business to pay attention to employee staffing. It is important yearly to evaluate the needs of the business and staffing levels to make sure your people are profitable for you. While different based on industry a good rule of thumb is revenues should be 3 to 6 times your payroll.
Customer Profitability Not all customers are created equal. Some customers regardless of size may actually be costing you money. Ask yourself How often do they buy? What is the average size of the transaction? Every transaction has a cost to you! How much time is spent providing customer service or technical follow up? What is the product return rate? If you look closely at your customers you should find Pareto’s 80/20 Law at work. 20% of your customers provide 80% of your profits. Many successful business owners have looked at this and then “fired” their unprofitable customers and replaced them with more profitable ones. Does this apply to your business?
I’ll cover a few other ideas in the next installment but for now look at these three areas of your business. Make changes where necessary and at the end of the day let’s all make more money.