Do you know where your company really makes money?
I’m sure you have a gut feel about this. But do you have relevant information and insights to support your intuition?
A few weeks back I attended a learning event hosted by the Nebraska Chapter of the Entrepreneur’s Organization (EO) with several of my fellow EO Iowa members. The speaker was Verne Harnish, a leading expert, speaker, author, and entrepreneur in the field of business growth. Here’s something he said that I wrote in my notes:
“You could double your profitability in one month by hiring one more accountant and having them slice and dice your profits and report it to you every day. Where do you really make money?”
I know what you’re thinking…
- Double my profits – yes!
- Hire an(other) accountant – nah, that’s more overhead!
- Report profitability every day – I don’t even have my profits sliced and diced on an annual basis, let alone every day.
If you wanted or needed to double your profits, where would you start?
Most of us start with ramping up sales and marketing efforts. But chasing top line revenue usually ends with a business owner saying something like “We’re working harder than ever, but we aren’t making any more money.” Sound familiar?
Here’s where I would start (and I think Verne would agree) – optimize the profitability of your existing products and services. Get a clear picture of how your company really makes money. Then, focus on growing the revenue streams that are the most profitable, assessing those that are performing at a mediocre level, and then stop wasting energy on those that are not producing. We’ve done this in our own business, with the clients we serve as outsourced CFOs, and on a project basis for other clients. Here’s how it works:
- Identify your most relevant and important profit centers. These are the ways you’ll “slice and dice” your profits. These could be individual product or services, customers, sales channels, departments, geographic locations, or business units.
- Calculate the actual profitability of each profit center. You’ll need to know the revenue and the costs for each profit center. Most accounting systems, including QuickBooks, have features for reporting your Profit & Loss (P&L) for each profit center in addition to your overall P&L.
- Evaluate your results and create a strategy to free up capacity and resources to sell more of your most profitable products. Stop selling the low-profit products and prioritize your marketing efforts on the high-profit products.
Accounting by profit center requires some discipline on the front end when entering transactions, but it’s well worth the value of the information you end up with to run your business. You may need to redesign your Chart of Accounts to capture this information and report on it more easily and frequently. Download our free Chart of Accounts Planning Guide and start refining your accounting system for more relevant information today.
When you know where your company really makes money you can stop falling into the trap of selling more and making less and use the energy and capacity you save to sell more of what’s already profitable.