Do You Know Where You Make Your Profits?

November 4th, 2017

The reality is that many businesses don’t have a good grasp on where they are making their profits. You wouldn’t think this would be the case, but 60 to 70 percent of CEOs are wrong most of the time when it comes to knowing the source of their greatest profits.

Why and how does this happen? Here are the top four reasons:

  1. Firefighting takes top priority. Being too deep in the forest makes it tough for managers to see the trees.
  2. People do what they like. Human nature means that business owners and managers tend to favor the area of the business they like and know the best.
  3. They’re making money. Many companies that don’t know where they’re making money are still profitable businesses. If businesses are making enough money to support their lifestyles and paying employees, being the most profitable business isn’t necessarily a top priority.
  4. Some of the value is hidden. Inventory and materials need to be tracked and costs need to be correctly allocated to product lines. When you visit the warehouse, you shouldn’t just see goods and materials, you should see cash.

Knowing how your business functions and where profits are earned is critical. Here are some things you can do to better understand your business:

  1. Don’t be afraid to ask questions, especially when there is the potential to improve profitability and the business.
  2. Get outside your comfort zone and be willing to explore alternatives, it could pay big dividends.
  3. Challenge yourself to go beyond traditional ways of solving problems

Many times, making improvements is a matter of changing your mindset. Rather than be satisfied with status quo, be proactive about improving profitability. Here are some ideas:

  1. Benchmark against competitors and perform a serious, metric-based analysis. You may have an idea on how you are creating profit, but do you know what the competition is doing? What is the competition doing differently and what can you change?
  2. Get the numbers. Get the facts and the numbers. Track everything and do it consistently. Measure, and measure again.
  3. Talk to employees. Most people don’t really tell you where you are making money. You’ll find that digging in with deeper analysis can really pay off.

The bottom line is understanding where true profits are made and is the key. Improving productivity, performance, and effectiveness should be an ongoing process that is consistently applied. You’ll find that focusing on the key things that drive your profits will result in creating a competitive advantage that is real and sustainable.