Identifying Profit Killers in Your Business

Profit Leakage – How to Keep Your Business Profit Margins Healthy

Businesses activities and sales do not always translate to a healthy profit margin.  There are numerous causes for stagnant or even diminishing profits for a business.  Let’s take a look at some of them, and explore some solutions for how your business can bolster and maintain its profit margins at an acceptable or even better than acceptable level.

Many margin killers are related to either inefficiencies or oversites within a business. Individually, these “leaking buckets” of money may not seem significant, but they can add up to significant loss in revenue, which comes right off the business bottom line.

Profit Killers Identified in a Business

Pricing of your products or services – it is crucial to set pricing which leaves an adequate amount of profit at the end of the day.  Low-balling on price, or neglecting to factor in all the expenses and overhead associated with your business will almost certainly result in lower profits, even though business may be “booming” as a result of your prices.  Careful consideration must be given to all your pricing decisions.  It must reflect your true costs, in order to show adequate profit.

Unprofitable products – if you are suffering from unacceptable or lower-than-expected revenue from your business, chances are one or more of your products or services are simply unprofitable.  Your financial data requires regular analysis to determine which of your products is not making the money it should.  Then you can take steps to either adjust the pricing of that product, improve efficiencies or cut costs associated with that product, or drop the product altogether. You may wind up keeping a less-than-profitable product, if it is supporting sales of other products or services you offer – but you need to do the analysis.

Customer relationships and the costs associated with them – in your quest for excellent customer service or development of a relationship with customers, you may be increasing your costs, and therefore losing on the profit side of the equation.  You need, once again, be diligent in determining if your own customers and how you deal with them are profit killers.  Steps that can be taken to address this situation may be to tighten up wording in contracts, or eliminate extras you may be providing at no additional charge which wind up eating away at profit margins.

Direct costs and overhead – when a company is in growth mode, the rising sales and revenues may result in lack of attention to the control of expenses.  This might include areas such as staff hiring, equipment, company vehicles, and marketing expenses which may not bring back an adequate amount of increased revenue.  These factors are best controlled by establishing and keeping strict control over budgets, and frequently reviewing them. Getting control of direct costs and overhead when times are good is the best way to handle these expenses, which will make things much more manageable in the event of a sales downturn.

Making use of technology – it may be that your business is not taking advantage of the many types of software out there that can help with identifying and controlling profit killers.  These include accounting software packages, and manufacturing-related softwares which assist in optimizing processes and controlling production costs, through scheduling, raw materials, purchasing, etc.  If your business lacks such technology based resources, you may be opening yourself up to any number of profit killers.

Profits Should Be Monitored Continuously

Leaving your business operations and accounting to chance, or only occasional analysis and scrutiny may be costing you serious money in terms of diminished profits.  You’re in business to make money.  You should take steps at all times to ensure you are profitable – profitable at the level you want to be.

We hope you have found this summary useful.  We are your accounting experts in the Toronto area.  Please contact us with any questions you may have regarding your business and its profitability.

AMACC

Mahdi Songhori, MAcc

WWW.AMACC.CA