Unlike the gut feel you have in listing your “dream customers”, it may be less obvious which products or services are truly contributing to the growth of your business. You may have “loss leaders” or cheaper offerings to get your foot in the door with a new client. But do you truly know if this strategy is paying off in profits as planned?
Most businesses track basic direct cost information, such as labor and materials. But do you assign these costs to products, services, jobs and customers? Do you know the profit margins for each item in your offering? Understanding and then acting on this information allows you to continue with “growth” product areas and prune “dead” products that are actually costing you money, time and distraction.
How do you bundle or present your products/services to potential customers? With this list in hand work with your accountant to set up your accounting structure to assign direct costs to products, services, jobs and/or bundles. Going forward, revise how direct cost data is gathered to tie it to specific jobs or packages (for example, revising time sheets to tie hours to specific jobs and customers). With your newly organized database, you will now be able to generate profit and loss statements at the product/service bundle, job and customer level.
To leverage this information, use company forecasts, industry data, and competitive analysis to establish benchmarks (e.g., targeted sales size, targeted profit margin on each service sold, employee efficiency ratios, etc.). Put a stake in the ground by establishing minimal levels of acceptable profit contributions by customer and by product or service. Compare your actual profit margins by customer, products and services to forecasts & benchmarks on a periodic basis throughout the year.
Now you have the data to make smart decisions on where to invest your resources and where to cut back. For example, banks and airlines have structured their level of customer service and response time based on the profitability “rating” of a particular customer or the cost of a particular service. You can now use this same approach to decide the level of attention and resources you will provide to each customer, product and market segment.
Author’s acknowledgement: The insights and process for these blog posts were taken from years of collaborative work with Sandi Chaisson, Your CFO on the Go® (www.YourCFOontheGo.com). Sandi creates value for her small business clients by elevating financial data into a strategic asset that drives profitable growth. Sandi has taught me a great deal about the value of accounting data.
And please join us April 7th for our next webinar on Uncovering Pockets of Profitability from your Accounting Data.