An entrepreneur makes changes in the business not merely to improve satisfaction or add excitement, but also to increase profitability. Determining if these creative actions are adding to the bottom line begins with identifying which categories on the business income statement are impacted by initiatives.
Typically, a change entails some additional spending in the near term that’s aimed at delivering benefits later. For instance, crafting a new sales strategy or marketing campaign will increase certain selling expenses. How can you tell if the expenses were worthwhile? Monitor the changes by comparing marketing costs after implementing the new strategy with the costs in these same categories under your old sales process (be sure to compare with the same time period last year). Later, examine revenue to see if you achieved the expected rise that should follow a successful program.
Other potential changes are new products, added services, a different menu, or a big sale. All of these enhancements are aimed at improving output, supplying an increasing number of customers, and improving sales. These goals are commonly preceded by higher expenses, such as acquiring product samples, adding a new employee, paying for new printing or promotional materials, buying extra advertising, and making changes to your website. To measure their impact, compare the increase in relevant expense to the increase in revenue. This ratio reveals how well your new actions have succeeded.
Some innovations are intended to increase profit without raising revenue. They simply aim to reduce expenses. For example, a new physical layout for your business may inspire easier workflow. If such innovations are worthwhile, your income statement will show an increasing profit margin due to lower costs. Success!