Most businesses have a percentage of their sales that are either break-even or not profitable. Too often, they don’t even realize it, but as they drive sales, they are increasing their losses and hurting their business. Without knowing the true costs associated with each product/customer/project, many don’t realize where they’re bleeding cash.
How do you find out? While intuition works for a while, at some point, you have to get the data and do the analysis. Examine the costs associated with each of your revenue sources — each customer, product, project or location. As you do this, keep in mind that costs can take on many forms, including direct and indirect, fixed and variable. Don’t leave any of them out. All are real costs and must be accounted for, from labor and materials to insurance, rent and debt service costs. Then compare these costs against the sales/revenue of each source.
With this data, you can now react. You may find that by bringing in less revenue, eliminating those sources that are losing money, you will increase your overall profit and cash flow. This mean you can go from being a business with revenue of $10 million and breaking even to a highly profitable $7 million company by working smarter, not harder.
A cost-revenue analysis will also highlight the areas where you are most profitable. You can then focus your efforts on these areas and get a second benefit – more profits from profitable activities. Focus on investing and growing those revenue areas to better your business.
A CFO from FocusCFO can develop the cash flow, operations and revenue analysis systems to compliment information gathered from your accounting department, giving you the complete picture of all costs in comparison to your revenue and enabling you to make informed decisions on where to eliminate waste and grow profit.
If you are interested in the services of FocusCFO, please contact us.
Next article in this series: How a CFO Helps You Identify Future Financing Needs
Previous article in this series: Managing Your Overhead Cost
How FocusCFO can help manufacturers:
In manufacturing organizations, understanding all the components of a product’s bill of materials, such as labor, material cost and fixed and variable overhead, is vital to the profitability of the manufacturer. Investments in inventory and fixed assets are sizeable; therefore, returns on investment need to be sufficient to support the appropriate capital structure and bank financing. These are just a few areas where companies can benefit from outsourced CFO consulting services.
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