Business owners strive to maximize the profitability of their companies. Determining your company's profitability can be trickier than you think, however. For example, say Business A generates $10 million in annual revenue against $9.5 million in total costs, while Business B generates $250,000 in annual revenue against $50,000 in total costs. Which is more profitable?
Measured in raw dollars, Business A comes out way ahead, $500,000 to $200,000. But in terms of profit margin, Business B trounces Business A, 20% to 5%.
The point is, there are different ways to measure profitability. There are also different ways to maximize your company's profitability. Let's take a closer look.
Profit Margin Reports
As a basic vital sign, profit margin — the amount by which revenue exceeds costs, expressed as a percentage — is a good starting point for an assessment of your company's health. But a "good" profit margin can vary drastically by industry. Grocery stores have an average profit margin of just 2.2%, for example, while the profit margin on automotive equipment rental and leasing businesses runs about 15.8%. Fine-tuning your profit margin requires a deeper dive into the specifics.
Let's say your business provides campers and RVs for rent at two locations, one inland and one on the coast. Your profit margin is 12%. That's not bad, but as the figure above indicates, it could be better. How can you improve it?
The short answer is that you need to do a detailed analysis of every aspect of your operation. Let's start with two of the most basic:
- Profit per product: How many different types of campers or RVs do you provide, and what's the profit margin for each? If your sales results run particularly high or low for a given variety — e.g. if your highest-end RV is producing a 20% margin, while your lowest-end pop-up camper is producing just 9% — then you might want to consider boosting your inventory of high-end RVs and cutting back on (or eliminating) pop-up campers. Units sold per type (or SKU number), must be considered as well. In other words, the owner should carry a variety of types, but consider which types are providing the best margins for the bottom line. Inventory should be weighted towards the better margin types of RVs.
- Profit per location: This yardstick provides additional insights, particularly when cross-referenced with profit per product. Let's take another look at that line of pop-up campers, which is hanging in the balance. Maybe when you parse the numbers, you find that the profit margin for pop-ups is an abysmal 4% at your coastal location, where there is plenty of competition from budget motels, but is a respectable 14% for your inland location, where motels are sparse. So the answer may not be to eliminate pop-ups as a product line; perhaps it would be a better financial strategy to trim some of the inventory and relocate the bulk of your pop-ups to your inland location. You could then push them as a budget alternative to motel rooms.
Those are two very basic examples of how additional data can boost profit margins. In the instance above, the business owner may fine-tune profitability still further by comparing different financing options for acquiring inventory, by outsourcing maintenance and repairs rather than hiring a full-time mechanic, by comparing sales not just season by season but week by week, and by testing the effectiveness of different marketing and promotional campaigns.
Outsourcing Can Help
Many small-business owners have neither the time nor the aptitude for higher level number-crunching. An outsourced bookkeeping services provider can help in several ways. An experienced bookkeeping services provider can not only clean up the company's books and provide accurate, on-time reports, but also provide the kind of big-picture insights that lead to higher profit margins. Reports can be customized and crafted to provide the data that management needs to fine tune profits and reduce expenses.
Isn't sustainable profitability the point of starting a business in the first place?