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Analyzing Profits – A ‘How To’ Guide

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
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.
Getting started
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.

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