“I don’t want to do business with those who don’t make a profit, because they can’t give the best service.”
– Richard Bach, American Author
Profit is the oxygen of any business. If your business is not making profit, you have a hobby, not a business. We all go into business for a reason, and if you want to fulfill your purpose for having a business, your business must be profitable. Profit is what allows a company to expand and stay viable. Profit allows the company to contribute back to the community, to research better ways of doing things, to explore and experiment in ways that benefit us all.
How do you know if your business if profitable or not?Successful business owners know that they have to regularly monitor several key profit measurements if they want to know how well the business is performing.Too often, business owners don’t take the time to study profit indicators.They figure that if the accountant is still able to write checks, they are still in business.They don’t have time to look at the math and determine what is and isn’t working.
When you’re not on top of your profit numbers, you are likely missing opportunities to increase your profit. Many businesses can increase profit substantially just by making a few quick changes to the systems they have in place. And in this economy, no one should be leaving profit on the table if it’s right there for the taking.
Profit margins and ratios provide a comprehensive and current snapshot of the company’s bottom line. They quickly point to bottlenecks in your production system and what part of the business is costing more than it should. Every company should have profit targets they work toward and periodic reviews to see how close or far they are from those targets.
Profit margins, such as gross profit and net profit, show the company’s ability to turn sales into profit. The business does a certain amount of sales and generates a certain amount of revenue. How much of that revenue falls through to the bottom line is an indication of how well the company is being run.
Return ratios determine the company’s overall efficiency. Efficient companies keep cost of goods and operating expenses under control, allowing them to convert more revenue into profit.
Companies should also evaluate customer profitability. Do you have some high maintenance clients that cost you more than you make on them? Monitoring customer profitability allows companies to better define who their ideal clients are and how to effectively and profitably manage them.
Next week, we’ll dig into the math and calculate some actual profit margins and explain what they mean to a company’s success. In the meantime, consider how well your business monitors profit. Are you confident that you are meeting your targets? Or are you just guessing at your bottom line? If you want your business to win, you’ve got to know how to keep score.
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