Digging into Profitability
If you're paying even the tiniest bit of attention to your books, you are familiar with your Profit & Loss statement: namely, how much you are making or losing over a period of time (whether monthly, quarterly, annually, etc.). It's possible that you have broken out your income and expenses to great detail, but there is still additional information you could be missing out on.
There are methods by which you can measure the profitability of different segments of your business, depending on your industry and the composition of your company. That can allow you to focus on the most profitable aspects of your business, while identifying areas for growth. Here are some of the most common ways we dig deeper into profitability on behalf of our clients.
Job-Costing
Job-costing is great for businesses who tend to work with a small handful of clients at a time, where the projects are long-term and clients aren't necessarily repeat customers. Job-costing is typically associated with construction, but can also be applicable for service-based industries that work on projects, such as large-scale marketing or software integration firms. In job-costing, each expense and revenue deposit is connected to a specific job, and P&Ls can be run by job, in addition to being run for the company as a whole.
Location-Based
Sometimes a company's business occurs in more than one place. Obviously, there are businesses such as dental practices, who have multiple offices. If those are managed independently, it makes sense to want to know the profitability of not just the practice overall, but of each individual location.
Location-based profitability tracking also works very well in the retail and service sectors. Anywhere one business has more than one location, they should be tracking how much money is location is making (or losing) for them. Additional education or possibly replacement might be necessary for General Managers who are not pulling their weight.
Firms with Partners
Sometimes there are businesses in which multiple individuals work within one location, but functionally act as separate business entities. In some law firms, for example, partners operate within the same space cooperatively, but it is still valuable to see who is bringing in the most revenue for the firm, and where expenses are being allocated. There are also certain health clinics or spas where multiple partners may offer complimentary services, and it is vital to track the revenues from each avenue.
Class-Tracking
Some companies have what are really multiple businesses operating as one. For instance, a farm might sell directly to restaurants in one area, sell to grocers in another, and operate a produce stand from which the public may purchase directly. Assigning a class to each transaction (again, both revenue and expenses), can allow the farmer to see the profitability of each segment. Class-tracking is also great when selling both directly and for resale, as sales tax is only applicable on certain sales.
General Rules
If you decide to implement additional levels of profitability tracking within your business, it is vital that you follow a few basic rules.
1.) Be consistent. Have an assignation for every transaction, every time. Otherwise, your data is inaccurate, and therefore, meaningless. (And it's been a waste of your time to do the tracking you have done.)
2.) Have clarity. Know exactly what your system will be for assigning transactions and have it written out, for either yourself or your bookkeeper. Make sure everyone who touches your financials is on the same page with the system.
3.) Be timely. We are always proponents of keeping financials up-to-date. However, this gets even more crucial when you need the additional level of detail required for profitability break-outs.
If you are interested in what profitability tracking might look like for your company, contact us for a free consult. We are happy to go over your financials and suggest ideas for growth and improvement.
