The Importance of Financial Awareness When Growing A Small Business

Understanding which parts of a business are most profitable is essential for success


All businesses should know which products or services make them the most profit but sometimes not even the largest most successful businesses do. And yet if you don't know which parts are most profitable then neither do you know which are least profitable and that can be a drain on your financial resources.

By fully understanding the financial side of the business you can determine where and how you can increase your profits. This could be by selling more of the products that do well then simply removing the products that don't do well or are even incurring a loss. It is quite simple: understand your finances thoroughly and you can increase the bottom line.

Do you know which products or services make the most profit and which are costing you money?

This is not such a crazy question as it might seem because sometimes hidden costs connected to the sale of a product or service can disguise the fact that they are not very profitable. For example you might think certain products with a high profit margin must be profitable overall, but if those products only sell in low numbers they might not be contributing very much the wider company profits.

Of course, some business owners are not concerned where the profits come from as long as the business is in profit but they are potentially missing out on areas of growth that could make the profits even larger.

So don't ignore the external costs of providing a product to a customer; remember delivery costs, insurance of fragile items, returns etc all affect the bottom line. And returns can often make up a high proportion in these days of internet shopping. So check all the external details – there is an added advantage in doing so in that this information can help you improve your existing products. If, for example, some products are frequently returned because they were the wrong colour you can easily change the description or the website photo to more accurately reflect the product.

Review all your business cashflow items on a regular basis to help you take decisions about areas for improvements both from the perspective of what you deliver to customers and, of course, from the perspective of increasing profits. A detailed review of the accounts is not something just to be done by your accountant or book-keeper to ensure you are paying enough tax, it will also give you a more thorough understanding of the financial side of the business and give insights into what is truly making money. It will reveal both the strengths and the weaknesses in your business.

Don't make excuses for not regularly checking your profit and loss accounts; even if you travel frequently there are plenty of software packages which offer access from mobile devices or even smartphone apps to check up on the profits from just about anywhere.

If your business is a service business then it may be less easy to see which areas are profitable but ask a chartered accountant to help you set a realistic cost for each part of the service and start tracking yours and your employees' time more accurately.

Another area affecting profitability can be the structure of the business; if it is not structured in a tax-efficient way then you could also be paying more tax than necessary. So talk to your accountant or tax adviser on how best to structure your business to minimize your tax burden. But remember that it is you, the business owner, with a vested interest in the success of the business who can best review the business for ideas of where to scale back on the less profitable areas, grow the most profitable areas and develop news ideas for growth.

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