June 15, 2016

Are You Judging Your Business By The Wrong Metric

small business financialsOftentimes when we food entrepreneurs want to see how our business is doing, we hone in on one main financial metric – Net Profit.  Are we making money or losing money?  That’s what that number ultimately tells us and it is, for the most part, the measure of success that most people are interested in.   While useful, that doesn’t mean it’s actually the most insightful number when you want to know how your business is really doing.  

If you really want to know what’s going on in your business, it’s far better to spend your time zeroing in on how your actual product sales are doing and going far deeper than just your sales revenue number.  By taking a look at your net profit by product you will be able to see which products are contributing the most to your overall revenue and which ones may be falling behind.

Through this granular look at how your products are performing on a per product basis, you may find some interesting information.  For example, if your lower priced products make up the majority of your products it may be due to the fact that your customers are more price sensitive and are drawn to lower price points and/or it may be due to the fact that your lower priced products are less labor intensive and therefore cheaper for you to produce and, thus, you get a bigger profit on those then on other products.

Understanding how your products perform on an individual basis can also help you determine where to place your marketing time and energy – whether your focus is to shore up those weaker products or to try to make the most of those that are selling well.

Lastly, these metrics can also help you make strategic decisions about your product portfolio.   Before you add a new product, you should compare it to your better sellers and see what similarities and/or differences (both in terms of product qualities and price/profit) it has to help you gauge how this new product will perform.  By lining up all your products side by side in this manner too, it will be very evident if any products are underperforming and that will help you make decisions about whether to put more focus on trying to boost those sales or cutting the product entirely.

I’m a firm believer that every line in a company’s Profit & Loss Statement tells a story about the business.  If you only have time to really dig deep on one though, I’d be far more focused on profit numbers by product rather than overall net profit.  The later only tells you if your company is ‘good or ‘bad’ when it comes to performance.  The former, however, gives you insight you can use to actually make smart decisions in how you run your business.

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