Companies repeat money-making activities every day but do they make the profit they think they’re making every time?
How can your business prove its profit?
Because if you can prove your profit then you can improve your profit!
By thinking about “Proof of Profit” not only can you make sure your core transactions are making the profit you think they should, you can increase that profit as well.
1. Set your prices. Estimate the costs of the product or service, add on a profit margin and you have the price (which must be competitive). You also now know the profit you expect to make from the sale.
2. Perform the service or deliver the product. You want this to run like clockwork and mostly it will but from time to time you’ll face and have to overcome problems, which will add to your costs.
3. Measure the costs of the sale. Ensure you can gather together all the costs of making the sale and allocate them to the sale in question. Make sure your accounting system is robust enough to do this.
If you sold a chair, how much did the chair cost? What about delivery?
If you sold a haircut, how much did the hairdresser cost, how long did it take them, what were the other costs incurred?
Now you can ask: Did I actually make the profit I expected?
4. Whatever the answer, improve upon it if you can. Think about ways in which you can edge your price upwards and your costs down. In particular, with transactions that are repeated hundreds or thousands of times a year, see what tasks you can automate or turn into systems and procedures and delegate down your organisation so that they are carried out as cost-effectively as possible.
Also, revisit any problems you had with execution and iron them out so they don’t repeat themselves and eat into your profits. Or price them in to what you charge.
5 Repeat! Do the whole thing all over again and again and again. But each time try to do it more profitably.
If you take care of the “Proof of Profit” cycle then you will consistently make the profits you expect.
You’ll also be delivering to a consistent standard to satisfied customers and this should help your marketing and sales efforts so you can sell more and make more money.
You create a virtuous circle that always makes money for you.
In some businesses it’s easy to see what the costs and revenues from a sale are, in others proof of profit can be a little more difficult.
For instance, if you’re a consultancy selling time then make sure you accurately record the time spent on each job and begin to think of your service delivery people as variable costs of sale rather than as fixed overheads.
If your business is project-based and you buy in labour and materials for each job then make sure you can allocate each supplier’s invoice to the correct job.
Without the correct data you can’t do proof of profit accurately, so start to capture the data you need as soon as you can.
The Gross Profit Officer concept was born when we helped a marketing company that ran hundreds of individual projects each year, some worth thousands of pounds and some much smaller.
By looking at the actual profit achieved on a sample of projects each month the client was able to see which projects were making the profit they should have and which were not. They could also see the underlying reasons.
By addressing the causes of lower than expected profit on particular jobs they were immediately more profitable and good practice on project management was shared across the business.
This client takes two sales per day and drills down into them to measure the profit on each sale.
Which means they’re looking at ten sales a week.
Which means they’re looking at 500 sales each year.
Which means they’re spotting problems, fixing them and learning from them all the time.
All of which means they’re making more more money from each sale!
Although they had all the data necessary to look at proof of profit, this consultancy struggled at first to turn it in to digestible, actionable information.
They measure proof of profit across their business for the last twelve months and the first time they tried it, it took a week!
Fast forward to today and using exactly the same data they can now produce their reports in under an hour.
Practice makes perfect!
“Proof of Profit” is a simple technique for helping you make more money. Can we help you?
Call Michael Austin on 020 7125 0270 or email info@bluedotconsulting.co.uk and let’s arrange a free, confidential meeting to discuss your business and the steps you could take to improve profitability.
Michael Austin
Related links:
Gross profit officer – appoint one today
Client profitability analysis – make more money from every sale you make
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