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How does your business make a profit?

Profitability Challenge
How does your business make a profit?

Author: Larry Chester, President

Of course, you know the answer! You buy raw materials, you pay your staff, rent and utilities and you sell what you make. But if you’re only looking at those few numbers, you are not able to make the changes you need to make your business more profitable.

Your income statement is the summary, the outline of how your company performs. But if you’re not digging deeper, you’re missing things that will dramatically change your bottom line. It is the subsidiary reports that really tell the story. Here are 5 things that you should be looking at that will make a difference.

  1. Trend analysis – Have you looked at your Gross Margin trends? You won’t see it over just a few months. Track it over the past 2 or 3 years. And be sure to look at it a number of different ways.
    1. By product line.
    2. By product.
    3. By customer.
    4. By region of the country (if that makes sense for you).
    5. Look at domestic versus imported.
  2. Payroll expenses – break down your payroll to see how it’s impacting your bottom line.
    1. Are you looking at it by department?
    2. Are you looking at overtime expenditures?
    3. Are you measuring FTE (Full Time Equivalent) employees against total dollars of revenue? What are your revenue dollars per employee?
    4. Are you becoming more efficient or less? It’s very easy to add staff, but is it contributing to your bottom line?
  3. Maintenance expenses – If you’re a manufacturer, how have your maintenance expenses been trending?
    1. Look by production line.
    2. Look by class of product produced.
  4. Scrap rates
    1. Does it vary by product line, by product?
    2. Does it vary by work shift? Is the third shift worse than the others?
    3. Is it getting better or worse?
  5. Inventory Turns – How is your money being used?
    1. Look at it by product line
    2. Inside each product line, by product
    1. Measure it by total dollars
    2. Measure it by value of each item


The devil is in the details. Looking at the overall numbers may make you feel good or bad. But what you need is information that you can act on. When you know how your company makes a profit, you’re in control of operations and can improve your bottom line.


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