If you want to make your company more resilient, you need to keep good accounts. Doing so enables you to look at your business in detail, and work out where you are making money and where you are losing it.
Identifying your profitable products
Every business has products and services that make them more money than others do. For most firms roughly 80% of their profit comes from 20% of the products that they sell.
This means that there are a lot of products and services, which do not really contribute to your firm’s profitability. In fact, some of them could be wiping out your profit because you are actually selling them at a loss.
To avoid this you need to run profit and loss reports on a regular basis. Looking at each item, in detail, allows you to pick out those products that you should be promoting more, and those you should consider dropping. You can only produce meaningful, and in depth, profit and loss reports if you keep good accounts, and keep your books up to date.
Is your range too big?
In an effort to appeal to as many customers as possible, many firms offer a very long list of products and services. This is especially true of the retail and manufacturing sectors.
Many businesses in these industries produce or sell multiple versions of the same product or service. Doing so creates complexity and cost for very little, if any, return.
It means holding more raw materials and requires you to run a bigger warehouse. That means higher overheads and more money tied up in inventory. Neither of which is good for cash flow.
Keeping your range fresh
Using your profit and loss reports to review the lines you sell, on a regular basis, helps to stop you from making this classic business mistake. It ensures that you stay on top of things. It enables you to spot those products and services where demand is falling away, and do so at an early stage. You can then make the necessary changes, and keep your business profitable.
It is never easy to drop products and lines, especially if you have been supplying them for many years. We all get attached to things when we are in business, so it is not surprising that you want to keep supplying that first line that made you a big profit. However, you must resist the temptation to continue to do so. If you keep unprofitable products and services on your inventory out of sentimentality you will soon end up turning a business that turns a profit into one that makes losses.
Understand your customers better
To be successful, you need to understand your customers. Regularly looking at what sells and what does not will keep you ahead of the curve. You will understand better what modern consumers want and be in a position to provide it.
Regularly updating your inventory and keeping things fresh is key to long-term success. Keeping accurate accounts and analysing that data is the best way to ensure your business continues to evolve and grow.
You can get more tips to help you to identify your non-profitable products here.