Have you ever lost your keys and find them in your pocket? Or look for answers that you figure out yourself? Well, finding hidden profits in your business may also be right under your nose. But, understanding how and where to dig into financial data and making it pertinent is challenging for most business owners. So how can profits be hiding, especially if you’re already profitable?
Consider taking yourself out of the business and looking at it with an investors “hat” on. Look underneath the “opportunity costs” imbedded in your company.
So what does that mean? The bottom line profitability of a business can be an overall sign of success. But profits are relative. Answer this question: “Is a one million dollar profit good?” Well, it depends. The amount of profitability is relative to the investment.
The bean counters call this “Return on Investment” or “ROI.” Think about it. If you invested $500,000 in a company and earned a $1 million profit in one year, that would be a 200% ROI which is very good. But if you invested $5 million and earned a $1 million profit, the ROI would only be 20%.
How would you know if your ROI is good for your industry? You must compare yourself to the industry and understand how you stack up. Knowing how peer companies in your region are performing will set the bar for how well you are doing. Industry data is available from various sources, but analyzing it is the hard part.
Every business owner should compare their monthly and yearly financials to themselves and others. Using “Common Size” analysis and a dashboard of financial ratios is the best practice. This allows fast identification of potential problem areas and those doing well.
Take this concept a step further and view your employees and your clients from this standpoint.
Consider that employee that’s been with your company for ten years at an annual salary of $50,000. You’ve made a half million dollar investment. Are you able to measure his or her contribution? Research on employee engagement states that an “A player” contributes 130% of their salary to productivity of a company and a “C player” only 85%.
Knowing the lifetime value of a client could reveal potential recurring revenue streams. The list goes on but the fact is… “What gets measured gets improved”!
Are you achieving the ROI you deserve from your business or would putting that money in the bank provide not only a better return but a better night’s sleep? The answer may be right under your nose.
Contact us here at 919-233-0076 or 919-371-8151 if you have any questions or comments. Thanks for reading and please share. Of course, you’re invited to Schedule a consult with me to learn more about the ROI we provide our clients.