Entrepreneurs depend on knowledge to succeed. They excel at maintaining their professional expertise, understanding customer needs, and assessing market transformations, despite all the other hundreds of day-to-day tasks they also must complete. They can distinguish what efforts are beneficial and what are wasteful.
The same applies to the financial data you must understand to succeed: Distinguishing between useful expenditures and imprudent ones is something an entrepreneur must learn, and quickly.
Sadly, many business owners haven’t learned this; they fail to dig through their financial information and, as a result, allocate resources to the wrong places. But it doesn’t have to happen this way. Digging for the truth is less difficult than you’d think.
Even if you’re a solo operator providing one type of service, profit center analysis delivers pertinent information. You’ll uncover, for example, what kind of customer is the most valuable and whether traveling to customers outside your main area is sufficiently profitable. You may find your limited time is best spent on customers of certain sizes, in specific industries, or situated in particular locations.
Get comfortable with your numbers
Don’t hate to dig through your numbers; get comfortable with your financial statements by capturing useful information from them, meaning your data must be in a format that works for you.
Financial statements are not just for tax calculations (although your tax liability should never be a surprise, as taxes are payable at various dates throughout the year, and you’ll owe penalties if you don’t pay when they’re due). Financial statements should also reveal the hidden costs of poorly chosen expenditures. You’ll turbocharge your financial knowledge by adding profit center details to financial statements.
Figuring profit centers
Associating expenses with specific services or customers allows you to focus on the most profitable opportunities. For example, selling new products or services could be generating greater revenue but little additional profit. Likewise, finding more customers beyond your turf may seem enticing, but not if the travel costs erode your profit margin.
Run your business on facts, not intuition. Making false assumptions based on general revenue figures is a recipe for disaster; the formula for successful growth is closely watching the bottom line. You must know where your profits are coming from.
Instead of making these kinds of false assumptions that are not supported by facts, craft your financial statements by allocating expenses to profit centers. The results may surprise you. And, as a consequence, you’ll benefit by placing the correct emphasis on selling your most profitable services to the most profitable type of customer.
A discussion with your accountant will help define profit centers for your organization. They could comprise different business offerings, key repeat customers, or regional markets. Professional assistance will also ensure that bookkeeping procedures are correctly designed to allocate revenue and expenses among the appropriate profit centers.
Even when all is going well for your business, profit center analysis gives you a forward momentum. Long-term success depends on never becoming complacent.