Know Your Profitability
Getting real with your numbers can be a difficult journey. What you think is going on financially in your business can come into question very quickly once you crunch the numbers and they’re staring you in the face. We love the numbers because they don’t lie. There is no opinion and no bias, if the numbers don’t add up they simply don’t add up. Which is also why they make for a great scapegoat. “Sorry Mr. Sales guy, my marketing budget just won’t allow me”.
The first step to understanding your business’ profit is to figure out where it’s coming from. Equally important is how much it costs to bring that revenue into your business. This (Revenue – direct costs) is your profitability. Don’t make the mistake at stopping at the money part of this analysis, you also have your time and the time of others to consider. After all they have said that time is money, right?
You should know what your most profitable services or products are. This doesn’t mean vaguely knowing that 50% of your revenue comes from one area, and the rest is spread across others. It means being specifically attuned to how much time and money it costs to generate X amount from each service or product. Often overlooked is the admin time spent on each case type. You should know how many hours and from whom are attached to each.
Here’s an example which takes into consideration the team’s time and all the associated potential costs of a given service or product.
Service/Product A: in our example above brings in $3k in revenue per unit, costs $996 in wages, $425 in expenses, leaving $1,579 after all is said and done for the business to absorb. The total hours spent on this service/product is about 9 hours from start to finish, which yields about $175 per hour to the business.
Service/Product B: brings in $5k in revenue, costs $654 in wages, $900 in expenses, leaving $3,446 in the business. Total hours spent was only 6 and equates to about $575 per hour.
You can quickly see here that the most profitable work this business churns out is in Service/Product B, and it even takes less time to generate the revenue. If this was your business, what would you do? Focus your attention a little, right?
Once you know your revenue formulas you can forecast upcoming cash influxes, and the time demands it will place on your team. This provides you with a heightened financial awareness. In many cases this type of detailed evaluation across all case types can lead to some strategic changes in the business’s direction and internal processes.
When you know better, it’s your responsibility to do better.
Now, go do better, business warriors!
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