When the numbers don’t add up: identifying the parts of your business that are unprofitable
Author: Russell SmithMay 5, 2012
If you look at your profit and loss account, you’ll clearly see your sales, expenses and profit. What you don’t see on a basic profit and loss account is the division between the different products and services that the business offers.
Most businesses will have core services and some additional services or products. It can be very difficult to separate these to find out which ones are making money and which are not. Accounting wise, the sales part is the easiest but then the job of allocating overheads and the time of your team on certain aspects can be a fairly big job.
The reality is that your business will have parts that are costing you money. When we have undertaken the task for clients to find out exactly where the profit is coming from, the client has always been struck with the results. It almost never seems to correlate to what they believe. A business can’t argue with the empirical data (although it may try) but it could still carry on with an underperforming product or service because it believes that it has a future. The tricky question that comes is how long do you carry on? When do you pull the plug?
A question for another blog post perhaps, but the point is that at least the business knows and has identified the loss making part of the business. At least then the action can be taken to carry on, improve or to get rid. Loss making parts of the business can often be understated because the directors and managers of the business do not allocate the management time accurately and the loss making parts of the business are often the ones with all the problems and problems consume management and director time. So you end up with an unfortunate double whammy of a product/service that doesn’t work which attracts costly management/director time that could be used on developing other products or on the more profitable products/services.
The point is, if you know your numbers, you get the chance to make a decision.