Most business owners cannot confidently answer this question as they are unsure whether all of their products or services are actually profitable. So what does that mean? Well regardless of whether you sell a product, or a service, or a bit of both, the question you need to ask is how is each item performing? For this to happen, you need to know your numbers.

Because lets be honest, it makes sense to focus on the things that are profitable. So do you think it would be powerful to know the profitability of each item? In many cases, there is a product or service that is an absolute bottom dweller. You probably don’t even like this product or service and it is consuming a large amount of time and resources.

But in the real world, you probably don’t even know whats performing high or low. So how do you go about finding this out? The manufacturing world have this down pat…well most of them. They use an accounting concept called: activity based costing. It has two aims:

  1. Identify and eliminate those products and services that are unprofitable; or,
  2. Identify and eliminate production or service processes that are ineffective and implement innovation and improvements in efficiency to lead to the very same product at a better yield.

So the first one is pretty self explanatory. If it’s unprofitable, get rid of it. But the second concept acknowledges the fact that it is unprofitable but asks the questions, can we innovate and become more efficient so the product is now more profitable? And importantly, is it worth the hassle?

Because each product or service you sell has a cost involved, be that time or cost of sale or both. For a service based business, say an architect, there is a large amount of time involved. This obviously attracts a large component of employee wages to perform which is a direct cost. If you sell a product you have to either manufacturer the item, which involves purchasing raw materials, purchase or rent of machinery, overheads and employee costs, or maybe your business model is to purchase items at wholesale then sell at retail. In all these examples you can see there are certain costs involved.

Oh, and just because you are the business owner, doesn’t mean you should discount your own time.

bjt financial unprofitable goods services

Do you think this beauty is still profitable?

Here are some tips on how you small and medium business owners can review your offerings:

  • if you use a job management tool that allows you to track time per job, review the last 12 months worth of jobs and compare the time spent on the job against the total revenue raised from each job. Are there any patterns for specific jobs? You might be surprised that some take forever for little revenue whereas others take little time but reap large profits.
  • if you are not currently tracking time, this can be very powerful as you’ll be very surprised at how much or how little time you are spending. At the basic end, software like Harvest or MinuteDoc can track time per job and integrate with Xero, all for the cost of a couple of mugs of coffee per month.
  • set up tracking categories in Xero so you can run reports giving you a per product or per service level of reporting. If you are unsure how to do this, check out my blog on setting up tracking categories. This can reap huge insights.
  • make sure you are also tracking your marketing spend and it’s ROI. This one tip can easily be a blog or two on its own but how many times have we spent money on marketing, be that Facebook or Yellow Pages or an advertisement in a magazine and not tracked the return on this money spent. You could have a great and profitable product or service but if its costing a tonne of cash to market it, then you either need to rethink your marketing or discuss whether it is still a good fit.
  • work with your Virtual CFO to customise your monthly reporting to show the breakdown of revenue and expense per product for the month and identify any trends. This is important because if you are not constantly innovating, then you are dying. A product or service might be pumping right now but if you are not tracking it, perhaps in 5 years time it could be redundant. Take Kodak for example, they missed the boat, now instead of printing out pictures everyone uploads to Facebook or Dropbox or Flickr.

So determining and tracking the profitability of products and services has two parts, the first is how does it look right now and the second is monitoring its profitability going forth.

Brad Turville

Brad Turville

Director @ BJT Financial | Helping private businesses fast track their business growth through big firm expertise and boutique firm service.