Profit and Loss Analysis and Tips

Every business wants to increase sales during rough economic times, but some organizations have literally "sold" themselves into bankruptcy. Here's how to avoid doing that.

Every business wants to increase sales during rough economic times, but some organizations have literally “sold” themselves into bankruptcy.

You know the old joke about the shopkeeper who sold everything in the store below his cost. “How can you stay in business?” someone asked. “Aren’t you losing money on every sale?”

“Sure I am,” he replied, “but I’ll make it up in volume!”

Of course, you never “make it up in volume.” The more goods or services you sell at a loss, the bigger your losses. A lot of businesses actually do operate this way unintentionally, because they don’t bother to identify key profit centers and eliminate marginal products or services.

Unlike our overly generous shopkeeper, they may not sell everything at a loss. But even one or two poor pricing decisions can drain the profitability of an otherwise successful enterprise.

During good economic times when sales are booming these problems tend to go unnoticed. But when business turns sour and earnings go South, weeding out unprofitable goods or services can be one of the keys to survival.

The owner of a large chain of Italian restaurants put this strategy to work. His lasagna is terrific, the service is great, and it’s a lot of fun to eat at one of his places. But when we conducted an analysis of his operations, we found that his menu prices were off the mark.

Some of the selections were priced at or below his cost of ingredients. Other dishes featured on the menu were so complicated and time-consuming to prepare that profits were wiped out by excess labor costs.

When the numbers were analyzed, the unprofitable dishes were exposed and their prices were increased. Our restaurateur then added some new mid-range selections to his menu–items like seafood pasta that could be priced reasonably yet still realize a good profit margin.

He ended up with a menu mix offering patrons a variety of meal choices and prices, while ensuring him a fair return no matter what they chose.

Isolating the major sources of profit and loss within your organization is an exercise that may well help you identify and correct other problems as well.

In another case, when a food wholesaler ran a detailed gross profit analysis of his operations, he discovered that some of the company’s biggest ticket items yielded absolutely zero profits to the firm.

After combing through stacks of customer invoices and matching them with the cost of goods, we determined that the goods had been priced properly and that the wholesaler should have been realizing a substantial gross profit on their sale. Where did those profits go?

He concluded that the profit drain must be occurring as a result of pilferage. The wholesaler implemented new security measures and, sure enough, profits bounced back.

Point is: unless you undertake a gross profit analysis measuring the contribution from every major component of your product line, you may not even be aware that you have a problem.

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