To monitor your bottom line profit you need to put some fundamentals in place. Once those foundational elements are implemented, you next need to create a monitoring schedule to check in on your profits.
Again, we’re not suggesting anything that is revolutionary in the world of running a business. But we’re presenting these suggestions based on our real world conversations with business owners as we interview them to begin searching for credit financing solutions for their businesses.
In other words, as obvious as this advice might seem, we’ve encountered many business owners who don’t have these fundamentals in place for their business. If they do have these building blocks established, we discover their systems for implementing and monitoring are only one step removed from “back of the envelope” calculations.
We want you to do incredibly well with your business! We’re presenting this obvious advice to help you organize these basics in a way that you can almost say to yourself, “Set it and forget it!” This leaves the system in place and removes so much anxiety and impatience from the day to day operations of your business so you can dig in to the two things that count most: loving what you do and building your business to even bigger scale!
The 4 fundamentals to measure profitability.
Timeline. What is the sales/production cycle for your business? Create a realistic expectation of when the cash hits your bottom line by reviewing your past three years performance. Look at your previous cycles. Calculate the turn times on when you delivered your product/service, and when you realized the cash injection to your bottom line.
Production Costs. While your production timeline might be, for example, three weeks, you must ask yourself if any production costs linger after the production cycle. Are there delayed payroll expenses? Are there residual expenses for cost of deliveries (freight costs, internet marketing costs, re-tooling expenses for next production run, Accounts payables to outside vendors necessary for the production cycle)?
Receivables. Review your Accounts Receivables aging reports for the past three years. What is the true timeline when you receive better than 90% of the cash income from your receivables after you’ve sold your product or service?
Delays. With each of the above three fundamental criteria, add a percentage variable to account for delays. What happens if there’s a slowdown in your ability to deliver your product/service? Add that into your calculation. Same for cost overruns that could lead to extended time periods of production costs
(What if your current freight delivery provider can’t manage the extra volume of a large order and you need to bring in another provider? What if you needed to add three more freelancers to complete video/content/production or implement design elements?)
Same with your receivables. Assume the worst for your slower paying receivables and add delayed payments to your calculations.
Time To Check Your Profits.
Once you implement the above four fundamental monitoring elements, now create a schedule to check in on your profits. Get it in your calendar! Lock the door! Give yourself (and your management team) time to focus solely on this aspect of your business. No interruptions, and answer the question: where do we stand with profit? If you’re profitable, what’s your bottom line number and does that match your expectations from your Business Plan?
Throw in the additional calculation: margin. Compare profit to expense. On a per product/service delivery price, what is the exact percentage in your profit column?
In the final analysis, literally, you’ll have a clear understanding of your profit. When you comprehend in clear terms how you derive profit for your business you can then think about how to improve profit. You may find yourself discovering new opportunities for profit centers and thus new products/services.
You may be pleasantly surprised that you’re more profitable than you thought you were. Then you can decide what to do with that extra income, to plow it back into the business, to create cash reserves, maybe make bonus payouts to ownership, make charitable contributions, or take a vacation!
Again, what we’ve found is that many business owners lack a clear picture of their profitability in terms of hard numbers, metrics that you can see on your computer screen.
These fundamental systems may seem daunting in terms of the investment of time and money to implement, but, like any other feature of your business, once you’ve put them in place, not only will they help you with clarity of your profitability, but you’ll only need to tweak these existing systems in years to come as you grow your business by leaps and bounds!
Email us with any feedback, especially any solid “fly by the seat of your pants” stories.