If there’s one metric that you should be honing in on as a small business owner, it’s profitability. Running a successful business all comes down to how profitable your services and products are.
Yes, cash flow is important—but we mean how much return on investment your products are truly bringing into the bottom line. Most small business owners assume that they have a basic understanding of the profitability of their different products.
However, the reality can be shocking.
Many businesses operate with several products or services—and even customers—that are not as profitable as they think. This can lead to a great deal of lost profit. Evaluating and understanding the profitability of each of these aspects is crucial to making sound decisions for your business as it grows and expands.
Profitable Products, Profitable Business
We’ve all been there. As soon as we get our first (or few) paying clients, we automatically assume that we’re profitable. That’s not always the case.
Here are a few typical assumptions that small business owners make that also happen to be a myth:
Assumption #1: My business is making money so I’m profitable
An assumption most people make is that as long as their business is making money, they immediately have a profitable product range.
It’s important to know that profitable products do not equal a profitable business. In fact, there’s actually a good possibility that one or more products or services are holding you back.
The only way to know the difference is to calculate the profitability of each product: what your customers pay minus the costs of manufacturing, storing, selling, and mailing the product.
Assumption #2: My clients pay regularly and on time so I’m profitable
Paying clients may not be as profitable as you think.
Just because your top clients buy regularly and pay on time does not mean that they’re profitable. They may actually be losing money for your business as a whole.
A few simple calculations are all that stands between you and these important figures. However, collecting and interpreting this data is often the complicated part. Large corporations hire full-time accounting and finance teams to collect and interpret this data, but small businesses historically have gone without it.
Profit, Loss, and the Bottom Line
Why “money-in” does not always mean you’re profitable
Adding up all of the odds and ends is one of the greatest complexities of identifying a profitable product. For instance, a product might first appear to be profitable based on the wholesale cost vs. customer cost. But add enough customer service time to the mix and it becomes unprofitable.
Packaging, storage, customer service, and other costs also often detract more from profit than you might realize. That’s why data collection is so important. It helps you complete an accurate analysis that considers all of the costs—even seemingly hidden ones.
Why a regularly paying client may not mean you’re profitable
Many small business owners are shocked to find that some of their top paying customers are actually costing them money.
As a small business owner, we assume that “a sale is a sale” and focus on moving volume. However, not all customers are equal. Some are buying products with a very thin profit margin while also cutting into margins in other ways, such as shipping. Knowing which customers and products are profitable allows you to make educated decisions and to focus your planning on the right avenues.
Take advantage of TrulySmall’s data & trend analysis capabilities
Luckily for you, small business owners and solopreneurs are equipped with many new solutions these days. Solutions like TrulySmall Accounting are designed to make understanding profitability easier for the truly small business owners just starting out.
Some of the top benefits of TrulySmall’s data & trend analysis capabilities include:
Make Running Reports Easy
TrulySmall Accounting is designed to help you take advantage of robust data collection and analysis through reporting features like Income Statement, Profit and Loss, and so much more. Reports can be customized by time period, saved for later, and exported into PDF for review.
Collects Real-Time Data to Reduce Operational Costs
By collecting all the financial data for you in the back-end, you can easily interpret real-time business data without investing in an accountant or an accounting team, as larger corporations would.
Accounting software that lets you invite your accountant to view your transactions is also a benefit for small business owners.
Cloud-based, Intuitive Software You Want to Use
Cloud-based, intuitive accounting software like TrulySmall Accounting makes inputting numbers simple and easy. Instead of adding numbers in a spreadsheet-like Excel, you can use a software program that is much simpler and more intuitive than Quickbooks, with all data stored securely on the cloud.
Get Nitty Gritty with Your Customers
Making a sale is a great feeling. But it’s even better when the sale is recurring. Because TrulySmall tracks each transaction in real-time, metrics related to your clients like Total Invoiced amount is always accurate. You can take that amount (e.g. what your customer pays) and subtract your expenses related to the client (e.g. shipping, manufacturing, etc.). That’s how you truly understand profitability!
Within TrulySmall’s Contacts feature, you can also leverage the “Notes” section to jot down any quick notes about profitability for later reference.
Understand Profitability and the Bottom Line Better
TrulySmall Accounting is designed to allow business owners to easily run reports that show profitability by product, client, sector, and more. This enables even the newest entrepreneur to make educated decisions that support future growth and success.
Imagine all the things you could do with better data
Even with the best concepts and products, many small businesses never achieve success. But with the right data storage and analysis services, even the smallest business owners or fledging entrepreneurs can make smart decisions about their future. Instead of spending with the least impact, more energy and attention can be dedicated to more profitable products and clients. This data can even lead to new innovations and entirely new markets. The sky is the limit when you thoroughly understand your market as well as your place in it.
Data and trend analysis often can make a huge difference. Developing a way to store and analyze data could be the determining factor in whether a small business owner achieves the success that he or she desires and deserves.
Understanding which products, services, and clients are the most profitable is key to sustained business growth. It’s one metric that differentiates between winners and losers. Though it might sound simple enough, there’s a whole lot more that goes behind it.
With modern cloud-based services like TrulySmall Accounting, even the smallest businesses—yes, the truly small businesses—can enjoy the benefits of cloud computing and expert data analysis. Try it today with our 14-day free trial and let us know what you think!