|
Your top selling product is not necessarily your most profitable one. In fact, it might actually lose money when you add up all of the expenses to make, market, and sell it. Knowing exactly how each of your products contributes to your bottom line can help increase the profitability of your business.
Tracking Revenue, Expense and Net Income
Many companies track revenue by product, but don't track the expenses to manufacture, sell, and support the product. They know how the product impacts the top line, but not the bottom line. These companies are only focused on one aspect of the business (revenue), but neglect two other profitability drivers: expenses and net income.
Most accounting software can easily be set up to track these for each of the products and services you offer. This will give you the basic information you need to begin understanding how and why your business makes money.
Let's look at two products offered by the Acme Company:
| |
Product A |
Product B |
Total |
| Revenue |
$10,000 |
$20,000 |
$30,000 |
The revenue line may fool you into thinking that Product B is the money-maker of the company.
But look what happens when all of the costs for each product are tracked:
| |
Product A |
Product B |
Total |
| Revenue |
$10,000 |
$20,000 |
$30,000 |
| - COGS |
$3,000 |
$14,000 |
$17,000 |
| Gross Profit |
$7,000 |
$6,000 |
$13,000 |
| - SG&A |
$3,000 |
$4,000 |
$7,000 |
| Net Income |
$4,000 |
$2,000 |
$6,000 |
If you only look at the revenue line, you would probably think that Product B is the star of your company, without realizing that Product A is the real money-maker of the business.
Better Analysis with Reports
Your accounting software has many ways to report financial information about your products. Use these reports to better understand the profitability of your business. For example, the following table shows percentages for Products A and B.
| |
Product A |
Product B |
Total |
| Revenue |
$10,000 |
100% |
$20,000 |
100% |
$30,000 |
100% |
| - COGS |
$3,000 |
30% |
$14,000 |
70% |
$17,000 |
57% |
| Gross Profit |
$7,000 |
70% |
$6,000 |
30% |
$13,000 |
43% |
| - SG&A |
$3,000 |
30% |
$4,000 |
20% |
$7,000 |
23% |
| Net Income |
$4,000 |
40% |
$2,000 |
10% |
$6,000 |
20% |
Questions to Ask
Looking at the percentages for each of your products raises some questions:
Product A
- Is it possible to increase sales of this product, since it generates most of the income for the company?
- Why is the SG&A percentage higher for Product A than Product B?
- How much would net income go down if more money were spent marketing this product?
Product B
- Why is the COGS such a high percentage of revenue?
- If you can't decrease the COGS, should you raise the price of the product?
- Should you switch your marketing efforts from Product B to Product A?
Knowing more about your products can help you make more money. Use your accounting software to track expenses for each product. Use product reports to help you figure out how to increase the profitability of each product and your company.
|
