Business
Profitability: Is Your
Business Profitable?
Is your
business profitable? Would you know?
It sounds like a painfully obvious question but figuring out whether your
business is actually profitable is no easy task.
Most small business owners have a pretty good idea of what their top line
is (their revenues), but unless they’re closely tracking and inputting all
of their expenses, the bottom line can often come as a complete surprise.
For example, a client of ours recently started a landscaping service.
Although his sales were rapidly increasing, he was frustrated by the fact
that it didn’t seem to have much of a positive impact on his bottom line.
He thought that by charging his clients $20 per hour and paying his
workers $10 per hour, the extra $10 would be his to keep. He forgot about
all of the costs involved in actually carrying out the job starting with
payroll taxes on the $10 wages, transportation costs, office overhead and
advertising. At his current rates, no matter how much business increased,
he would never make any money.
By inputting all of his costs into the proper format, it became
immediately apparent he wasn’t charging enough for his services. The
answer was to raise prices or get out of the business. Fortunately, he was
able to raise prices without upsetting clients. Now he can comfortably
carry on his business and keep adding to his bottom line.
Track Key Numbers
Every business has key numbers that directly affect its bottom line. These
numbers can vary from industry to industry, company to company, and even
between departments.
For example, food costs are important to a restaurant while our landscaper
client needs to track such costs as owning and operating garden machinery.
A company that has both a software development division and a consulting
division has different expenses and revenue streams for each, and needs to
break them out so they can be monitored individually.
Make sure you know which figures are critical to the success of your
business. Then make sure you customize your financial statements so you
can follow those figures closely. They provide crucial information about
your business peformance and can give you early warning signs of problems
that might otherwise sink you.
There are three key financial statements to review:
Income
Statement: Shows all revenues and expenses during a given time period.
Also called a Profit & Loss (P&L) statement.
Balance
Sheet: Shows all assets and liabilities of the business.
Cashflow
Statement: Shows the actual money that flows into your business and how it
flows out during a given time period.
Review
Your Financial Statements
Most businesses should review their financial statements on a quarterly
basis as a bare minimum. Monthly reviews are better and some businesses
can benefit from weekly or even daily reviews. The frequency that’s right
will depend on the size of your business and your volume of transactions.
If you’re not sure how to read or interpret financial statements, ask your
bookkeeper or accountant for help, or pick up a book such as Finance and
Accounting for Nonfinancial Managers.
Still not convinced it’s important to bother with all that financial
“mumbo jumbo”?
Here’s another example: A restaurant owner had two locations but only one
set of books. Although he had the feeling that one of the locations was
not doing very well, it was only by formally splitting the two that he
discovered the true magnitude of the problem.
One location was making all the money while the other was losing it in
buckets! The owner decided to close the money-losing operation and give
his full attention to the profitable location.
Creating and using financial statements on a regular basis will clearly
tell you if your business is making -- or losing -- money and will also
show you what needs to be changed to address any problems.
Fern Gordon is co-founder of
The Profit Line, a bookkeeping service for small to medium-sized
Canadian businesses. She has a background in investment banking, and
started and operated a successful chain of restaurants for more than eight
years. Fern can be reached at (416) 861-8177 or
ferngordon@theprofitline.com
