How does your business make profits when you’re being pulled in all directions?
Chances you spend more time on poorer performing parts of your business, but is there a ‘star’ in your business? And if there is, why isn’t it obvious?
Direct costs are often lumped into overhead
People often lump all labour into overhead rather than direct costs. When they do this, we don’t see how each platform is really performing. Typically mis-allocated items include:
- Labour
- Management time
- Dividends (particularly where dividends are paid as an alternative to a market-rate salary)
- Rent for office / production / warehouse space
Let’s look at a real life scenario:
Looking at this business model, it might make sense to focus on platform B – your biggest seller. Or increase sales across the board. However when costs have been allocated appropriately we see the following:
- Platform A is doing okay.
- Costs are higher than sales in Platform B, making it a loss-making activity.
- Costs are low in platform C, where the profit margin is significantly higher.
What happens if we pursue a straightforward ‘sell more’ approach? Selling more on platform B will simply increase losses, or offset profits made on the other platforms.
It also makes sense to reduce sales on Platform B while you understand why the platform is loss making. What’s surprising but clear is that fewer sales have the potential to generate more profit.
This reinforces the maxim:
Turnover is vanity, profit is sanity
Of course, cash is always king!
How can business owners avoid this problem?
It’s a two step process.
Firstly, find out how each platform is really performing. Allocate costs and overheads appropriately.
Secondly, take strategic decisions about which areas to spend time on / promote. Are there lower-performing streams you need to maintain to bring in new customers? Are there others you can cut back. Can you divert your time into streams with higher margins? Is one of your products killing your business?!
It’s all about working smarter.
Book your Business & Xero Review
Worried about profits or cash in your business? Book our review today. For just £195+VAT we’ll have a 45-minute video call with you and do a behind-the-scenes review of your Xero account. We’ll look at how different parts of your business are doing, and what steps you can take today to increase profits and cash.
Contact our team for a conversation to uncover the star in your business!
