If you have been in business for a while, at some point, you will need to make the transition from surviving to thriving. One important way to get there is to identify which parts of your business are profitable. Many conversations with our clients revolve around this topic. We are sharing some of the suggestions we have shared with our clients. Hopefully, they can help you too!
Start with your revenue cycle
What is a revenue cycle? It’s the sales process that starts when you provide your services to a customer and ends when you get paid. Why is this a good starting point to examine?
A key factor in a company’s ability to generate revenue is time. If your revenue cycle is slow, you may be providing a ton of services with little to no cash to show for it. Ultimately, this will affect your bottom line, as you need cash coming in to pay for the labor and expenses associated with providing your services.
When looking at your revenue cycle, ask yourself these questions:
- What are our payment terms with customers, and how many are following them?
- How are we invoicing our customers? Mail? Email?
- How are we collecting payments? Check, cash, electronic payment?
- In a typical fiscal year, where do I see higher demand for our services?
- If I have slow payers, what are the common reasons behind it?
Identify who you are selling to
All small businesses have a core demographic that they sell to. Identifying who that group is can help you determine which parts of your business generate the most profit. The groups that bring in the most revenue should get the most attention in your marketing and sales efforts.
When examining your demographic, focus on these key areas:
- Where do my clients live?
- How are they finding out about my company?
- What industries do we serve?
For example, let’s say you provide IT Services to several clients. A quick review of your customer list reveals that a sizable portion of your clients live in the Pacific Northwest and are in the restaurant industry. What can you do with this information?
Your sales team can focus on attracting more clients from this industry. You could create targeted marketing campaigns focusing on the values of these types of consumers. You can even join local business networks in the region your customers are from. By knowing who you are selling to, you will bring in prospective clients that you know will generate profit.
Use financial reports to your advantage
Your financial reports are the best source of information on profitability. If reading these reports seems overwhelming, there are some practical things you can do in your accounting system to make them easier to understand.
First, divide your revenue into 2-3 core categories. If all of your revenue appears on a Profit & Loss (P&L) statement as one line, it’s difficult to figure out which services are profitable. Review your sales history and pick a few of the most common services requested by your clients. As you look at your P&L each month, you can track the profitability of each category.
Second, track revenue by region. If your sales are spread out across multiple cities, states, or countries, tracking the profitability of each region will be helpful. It can give you an overall picture of which geographic areas you should focus your efforts on. Most accounting systems allow you to set up tracking categories assigning sales by location.
Third, track revenue by project. This is especially helpful for businesses in the construction or trades. If your business involves project work, you can set up each customer as a project in your accounting system. Both QuickBooks Online (QBO) and Xero offer tools for project tracking. As you review your projects, you can determine which generated profit and which did not. Over time, you can identify the commonalities that lead to profitable projects.
Your business will begin to thrive when you are able to identify which parts of your business are profitable and then by taking action based on that knowledge. Understanding the profitable areas in your business will help you concentrate your efforts in the right places.
Like the suggestions above and looking for more advice on profit? Check out another article discussing where your profit is going.