An easy way to increase your profits is to figure out exactly where they are coming from. Almost every business deals with at least several services or products (if you’re in retail this is likely into the thousands of products). Commonly it is assumed that as long as you are selling the product for more than what you paid for it and business expenses are being covered, then everything is fine; not so. You need to look at all the expenses attributed to that product to calculate the true cost.
For example, let’s say you own a business that sells fire wood and wood pellets. Each product makes up 50% of revenue, they each retail for $10 per unit, and they cost you $7 each. Now look at the associated costs. Since wood pellets need to be kept dry, they use up all of your warehouse space. Now you have to attribute 100% of your indoor warehousing costs to wood pellets. All of your other business costs are distributed evenly amongst the two product lines. Once the numbers are crunched, the true cost of wood pellets are $10 each and only $4 for firewood. This tells you two things; first, your profits are really coming from fire wood sales and maybe you should look at increasing those sales since the margins are good (extra marketing, sales staff, etc); and second, you are only breaking even on wood pellets, so you need to increase the price, reduce expenses operationally or get better pricing from your supplier.
Some of the most common mistakes in (not) attributing costs to products are:
- Storage (suppliers always give great bulk discounts, but then you have to store the product)
- Labour (your low cost employees are working on a project but they keep pulling in your expensive employees for help)
- Productivity (during a 40 hour work week how many hours are staff spending hanging out at the water cooler or on facebook)
- Post Sale Customer Service (you’re selling a lemon and the phones are lighting up)
- Shipping (yes you can get it cheaper from China, but then you have to ship it and wait three weeks)
By having a professional crunch these numbers you can easily increase your profits and set up a road map so you can continue to evaluate your own progress.