If you’re making losses in your business, it’s obviously not a nice place to be. If you’re making a profit, it may seem like a nice place, but how would you like to be in an even better place?
You may think that if you’re making a profit, everything is fine – what have you got to worry about? The issue is that you may be making a profit in some parts of your business but making losses in other parts. This means the loss makers are dragging down the profit makers and you could be even more profitable if you knew which parts of your business that they were.
Accounts are often done mainly for taxation purposes, rather than for management purposes. This means that sales are all lumped into one account because the taxman doesn’t care where you’re making or losing money. Also, costs and overheads related to certain types of sales aren’t separate, so you can’t easily see if they are profitable or not.
The secret to uncovering where the profits/losses are being made is by setting up ‘profit centres’ in your business and accounting for them separately.
There’s a bit of work to be done in setting up your accounting system to keep track of your ‘profit centres’, but it’s well worth the effort.
Acme Service Business makes four types of sales:
- Equipment sales
- Monthly maintenance contracts
- Ad hoc service repairs
- Equipment consumables
Acme has been making reasonable profits of around $50,000 per annum on sales of $1 million.
When CFO On-Call analysed their profit by ‘profit centre’ we found the following:
|Monthly maintenance contracts||$30,000|
|Ad hoc service repairs||$10,000|
Our CFO Consultants put in place a strategy to turn around the loss of the ad hoc service repairs to a profit of $10,000 by increasing the price and closely managing costs. This had the effect of creating a 60% increase in overall business profit!
By understanding where we needed to focus attention, we were able to create a great result without spending lots more money and time.