Which Products & Services are Profitable?

This is a question you'll want to ask yourself regularly, and the good news is, this information is readily available from your accounting system - assuming it's been set up correctly.

Many people look at their accounting system and only see the Tax Department. It's a really common misconception but the truth is -

Your accounting system is there to help you make good business decisions.

If you're not an expert in Accounting Systems, and let's face it, you're not starting your business with the sole aim of becoming a whizz at MYOB, Quicken or any of the others - it's probably best to get your accounting system set up by an expert. There's several reasons for getting help here, which are best illustrated with a couple of examples.

Common mistake #1 - Lumping all products or services into a single income account might make bookkeeping appear easier - but decision making is made much HARDER

Consider this first example:

Which product should you focus your marketing dollars on?

• You've been in business for 12 months and you get the opportunity to exhibit your products at a local expo - it's going to cost you $2500 so you really need to make a good return on your investment of marketing dollars, i.e. you need to sell more of your most profitable products.
• You're selling 'Product A' really well - it's your bestseller, selling 3 to 1 of 'Product B' - but you're having to discount 'Product A' by 20% as there's stiff competition in your market for similar products, leading to a low gross profit.
• 'Product B' is not your strongest seller but there's limited competition for this product so you're selling it at full price and making a good profit.
• You may only need to sell 1 of 'Product B' to make the same amount of profit as selling 4 or 'Product A' - but how would you know this unless you split the income and variable costs of each product (or product group) in your accounting system.
  

If your Accounting System was set up correctly you'd know in moments which product was going to give you the best profit margin and help you recoup your marketing costs quickly. It's important to remember here that we're talking about PROFIT and not just REVENUE.

Suggested Reading - Revenue vs Profit

It may be tempting to say in this instance that the expo is a branding exercise for your company, in which case you feel the expo doesn't really need to make a profit in itself. That's a really common way of thinking - but how many times can you spend your precious marketing dollars without making a profitable return on your investment and stay in business? Now would a good time to remind you of the statistic - 80% of small businesses exit the market within 3 years. So, unless you're in business for some other reason than to make money - you'll stay in business for longer if you focus your energies on where you're profitable.

Common mistake #2 - Letting someone who hasn't taken the time to fully understand your business set up your Chart of Accounts

 

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