Got Profit? TM
June 11, 2009, 12:42 pm
If your business is going gangbusters and you are making more profit than you can possibly handle, then STOP READING! Go straight to your favorite coffee shop and congratulate yourself with your drink of choice for your outstanding success.
On the other hand, if you’re not making as much as you would like, or think you should be making more, then feel free to read on. If you’re losing money, then definitely continue reading.
If your business’ Net Profit is:
● overwhelmingly positive,… why are you reading this? You’re supposed to be enjoying your favorite beverage
● muddling along, then now is the perfect time to take action
● losing you money, then better late than never
And finally, if you don’t know your business’ Net Profit, then you are starting at Square One; which, if you have been in business for some time, is not a good place to be.
Square One
Your business needs a set of financial books. Period. In the beginning, you might not need a bookkeeper, an accountant or a tax advisor. You might not need Quick Books, Quicken or even Excel. And if you really, really dislike numbers, you might not even have a shoebox (but you should).
At the very least, you need to be able to sit down at a table with three pieces of paper, a pencil, an eraser and a calculator. With these supplies and equipment, you then do the following:
1. On the first sheet, titled “Revenue,” jot down all the incoming money generated by your business. Total these revenue numbers.
2. On the second sheet, titled “Expense,” jot down all the money spent on generating the revenue listed on the first sheet. Total these expense numbers.
(Note: this is where a shoebox comes in handy. The tax authorities like substantiation-such as receipts for all those expenses)
(Hot Tip: don’t store the shoebox in a hot place-like the dashboard of your car. Many receipts are printed on thermal paper. Heat makes them illegible)
3. On the third sheet, titled “Net Profit,” write down the following equation, using the numbers from sheets 1 & 2:
Total Revenue (+$) minus Total Expense (-$) equals Net Profit (+/-$)
I hope nobody is on Square One for long. But if you are, let’s talk. We could also talk if your company’s profitability is not rising as fast as you think it should be, is just muddling along, is falling, or is already negative.
In the meantime, here’s a generic approach to assessing the state of your company’s Net Profit:
1. Review the trend in the financials (monthly data is best)
2. Identify issues
3. Pinpoint reasons (e.g., cause & effect)
For example, is the main problem revenue? Or expense? A combination of both?
4. Research business drivers (i.e., for the reasons pinpointed, what is causing the adverse impact?)
5. Create alternatives (i.e., how to counter the adverse drivers and conditions)
6. Recommend an alternative (i.e., all things considered, pick the path that addresses the biggest issues and has the best chance of success)
7. Decide. Yes, this must be done.
8. Act. Yes, this is important.
9. Monitor. As we all know, things change. Was the analysis right? Is net profit turning around? Improving? How much time do you have?
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 20
© 2009 Integrated Profitability TM
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