Many small business owners focus on generating more revenue every year, and that’s a great objective. But not all income is created equally. If you have more than one type of division/service and/or service/product, then it’s worthwhile taking a closer look at the profitability of each.
Although it’s fun to watch your income grow, it’s the bottom line (your profit) that really matters. If your expenses grow faster than your profits, that means 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.
Most of you have different divisions/departments in your company – maybe even locations. Hopefully those are set up as Classes in QuickBooks so you can quickly compare. And for those of you who have projects/jobs (which is probably most of you reading this), then I’m hoping that your job costs are in the cost of goods section so you can compare profitability of your different divisions before you look at your bottom line after overhead expenses.
One way to increase your profitability is to increase your most profitable division/product line/service and do less of the least profitable of your divisions in terms of dollars.
Here’s another way to look at your revenue mix. Then 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 profit?
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% profit margin on Service X, but earning $30K on $150K yields nearly double the profit margin at 20%. Service Z generates the higher profit margin. And if possible, Service Y may need to be discontinued or turned around. With the aid of Classes and Customer Types from QuickBooks, you can get 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.
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?
A New Year, A New Mix
I hope you’ll spend some time analyzing your revenue mix and ask yourself “what if?” If I can help you get the reports out of QuickBooks so you can easily review these numbers or want help structuring QuickBooks so this process is simpler, let me know.
Contact our office if you have questions or would like assistance 301-696-1303 www.muirassoc.com