Profitability Comparison Template
This Profitability Comparison template enables you to take a high-level view of the profitability of a range of your products or services over a specified period.
At the heart of all business is the idea of profitability. Making money on the sale of goods or services is, at the end of the day, what it is all about. If you make a great product and sell millions of units, but make no money at the end of it all, what was the point? Whether you are the owner and looking at the bottom line as your payoff for all of the investment and hard work, or a manager who is measured by the size of the profits, getting a great return is in everyone’s best interest.
Oddly, the profitability of individual products is a point that sometimes gets lost in the shuffle of trying to produce and sell goods. Total units sold is a number that is constantly analyzed and worked to be improved, but the profitability of each of those units should actually be a bigger concern. Consider the following example – If your business sells 1,000 units at a profit of $1 each, the company has made $1,000. However, if the business sells just 400 units at a profit of $3 each, the total profit is $1,200. $200 more dollars will have been made by selling 600 less units given a better profit structure. This is obviously a very basic example, but it highlights the importance of efficiency and cost control over mass marketing and purely volume sales.
One of the most important pieces of information for a manager to possess is the profitability of each and every product or service that a company offers. Knowing which goods are the most profitable, and therefore the most worthy of investing resources in, can guide decision making successfully. Many managers have made the mistake of simply pushing the most popular products, and not the most profitable ones. A good manager will identify the goods that are the most worth selling, and then find ways to sell more and more of it.
Once the profitability of specific products and services is quantified, choices can be made on how to proceed with those products. Low-profit items might be worth continuing if the sales they generate help to build a brand image or some other asset for the business. Likewise, highly profitable products might not be feasible to grow depending on the size of the market that they appeal to and the manufacturing capacity within the current cost structure. The decisions you as a manager have to make are not as simple as just ‘selling more of the products that make the most money’. However, knowing which ones make the most money is a great place to start.
Be careful when trying to determine the profit margin of a specific product to include all possible costs associated with the production, and any changes in cost that might arise from changing the current process. For example, if a profitable product is manufactured by using the byproduct of another process, the profitability of the first product might take a significant hit if you stopped performing the other process and no longer had access to that byproduct. The production of a line of products within one company is inherently connected, so close analysis is required to project both current and future profit margins.
Understanding profitability is one way to set yourself apart from the rest of the managers within your organization. While they might be making decisions simply on which products can be sold at the highest volume, you will know better and have a more refined approach to your decision making. Profitability is not the only input that needs to be considered when making product decisions, but it is one of the most influential on the bottom line. Take the time to analyze each of your products or services for their specific profit margin and you should soon be able to fine tune the day to day operation of your business.
As a manager, you will usually be expected to understand basic accounting concepts and communicate effectively with financial people in your own organization. You may also be asked to contribute financial data about your own business unit. The basic principles of accounting are best understood by considering some simple businesses and how they might document their financial activities.
Accrual accounting is considered to be the standard accounting practice for most organizations, and is mandated for organizations of any real size. It provides a more accurate financial picture, but is more difficult to administer. Terms like ‘revenue,’ ‘expenses,’ ‘gross profit,’ ‘depreciation,’ ‘bad debt,’ and ‘fixed assets’ have precise definitions when used in business accounting. You will also need to understand exactly what is meant by accounting terms like these.