Many small business owners focus on generating more revenue every year, and that’s a great objective. But not all revenue is created equally. If you sell more than one product or service in your business, then you can benefit from looking at your revenue mix.
Although it’s fun to watch our revenues grow, it’s the profit number that really matters. If your expenses grow faster than your profits, then you have a lot of activity going on, but you don’t get to keep as much of what you make, which is what really matters.
An insightful exercise to try is to take a look at your revenue mix. Then you can ask “what if?” to optimize your profits.
Your Revenue Mix
Let’s say you offer three different services: Services X, Y, and Z. To keep the math simple we’ll say your revenue pie looks like this:
X: $700,000 or 70% of the total
Y: $150,000 or 15% of the total
Z: $150,000 or 15% of the total
Total: $1.0 million
In this example, Service X is clearly the service making you the most revenue in your business. But is it making you the most profits?
Let’s say you notice that the profit you receive from each of these service lines is as follows:
Y: $10K loss
While Service X is generating the most profit volume for your business, it’s actually Service Z that’s the most profitable. Earning $80K on $700,000 yields 11.4% return on Service X, but earning $30K on $150K yields nearly double the return at 20%. Service Z generates the most return. And if possible, Service Y may need to be discontinued or turned around. With the aid of Classes and Customer Types from QuickBooks, you might have more insight into those numbers.
Your strategy for a more optimum revenue mix might be to sell as much of Service Z as possible, while eliminating or fixing the problem around Service Y.
It’s fun to experiment with different revenue mixes. And of course, there are many more variables besides profit, such as:
- Which service do you prefer to work on?
- Are you able to sell more of the most profitable service or are there marketing limitations?
- Is one service a loss leader for the others?
- Are you able to adjust price on the lower margin services to increase your profits?
- Is one type of customer more profitable than a different type for the same service?
There are many more questions to ask and strategies to consider to make you more money, which is why we love our job!
A New Year, A New Mix
We hope you’ll spend some time analyzing your revenue mix and having fun asking yourself “what if?” If we can help you get the reports out of QuickBooks so you can review these numbers or want help structuring QuickBooks so this process is simpler, let us know.