Sorting the wheat from the chaff – what contributes to profitability, and what doesn’t
When a business owner looks at their financial reports, the eye goes straight the bottom line, the profit. If it’s over or close to budget that’s good, but it’s important to look further and try and analyse trends. Business owners need to see where they might be under-performing or where overheads might have blown out.
If there’s no profit then that analysis becomes even more critical, and that’s what we’re looking at in this blog.
Business owners have different approaches when it comes to analysing their financial performance, but no matter how you look at it, a healthy surplus is the end goal. As a result, the make-up of profit is a vital factor in running a business. This is true of any business owner who’s in it for the long haul. However even during these times taking your eye off the ball can have negative consequences.
So what contributes to profitability? In most cases, it is depends on the activity. Even the most common business of buying and selling stock can vary; sometimes the gross profit can be very strong, but the number of people required to deliver the results is too high. Or it could be that the cost of transport not being recouped is killing the profitability. Aged stock may be sitting on the shelves. For a service-based business, the amount of non-productive time, managing fixed price contracts or difficulty in project management can impact negatively on profitability.
It would be fair to say that in a competitive market, profit is continually under pressure from customers, staff, suppliers and the market as a whole. Having systems that look at all aspects of the business to establish how profit is determined at a lower level is vital.
Business owners who understand how their profit is derived and have systems to measure the different facets of that profit achieve more. It’s virtually impossible to run a business without systems to manage the processes or at least generate invoices and record costs. When all the costs are taken into account, including people, offices, warehouses, transport, communications, infrastructure and finance costs, the costs of business systems are a small fraction. An increase in that investment could have a large impact on the profitability. In the words of a famous business performance guru:
“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.” – H James Harrington
If you’re keen to find out more about how to figure out what’s profitable for your business and what isn’t, check out our Qlik Sense solution. It’s designed to help you analyse your data in a way that provides insights into your business and help improve profitability.