Where Is Your Gold?

This article will help you to identify your most profitable products, services, customers and employees.

Phil’s Profit Points™ in Brief:

• Your gold is the gross profits generated by your most profitable products, services, customers and employees.

• You can evaluate your gold by measuring the revenues—by type—against the direct expenses such as materials and direct labor, thus generating gross profit.

• The volume of gold is measured by the gross profit dollars and the gross margin percentage.

• Gross profit and gross margin are used interchangeably. I’ve attached ‘percentage’ to the gross margin to distinguish them. You can do whatever works for you.

• Converting your gold to cash means that you need to collect on the sale.

The Symco Gold Formula

Do you know where the gold is hiding in your own company?

Most accounting systems that I’ve seen, from Simply Accounting and QuickBooks to more robust applications like Sage’s Business Visions and QuickBooks Enterprise, which are the grown-up versions of the former, can be set up to report revenues and costs of sales by product and service line. This structure is created in your general ledger. You can export the information to a spreadsheet to analyze the data. The best business systems, like SAP Business One, can be set up to generate this information automatically. (Full disclosure, we recently implemented SAP Business One for our companies).

You know your general ledger is set up poorly if the only detailed revenue report that you can generate shows revenues on one line. Major revenue types should have their own account categories for both revenues and cost of sales so that you can create a gross profit analysis and discover which products and services are the best (and worst) performers.

Here is a weak structure, which I call “Level 1-Little League”:

Revenues $25,000,000

Cost of sales $15,000,000

Gross profits $10,000,000

Here is a good structure, which I call “Level 2-Semi-pros”:

Tip: you can also compare the vertical percentage of each column as a percentage of their sales.

Here is a great structure, which adds to the above information, and which I call “Level 3-The Professionals”:

Analyzing your customers by the framework in Level 3 will provide powerful information. A huge customer that takes forever to pay may be costing you money. Small customers that pay quickly might be your golden nuggets.

You can maximize your profits, the value of your business, and your personal wealth by analyzing your business using this framework and by making decisions that ensure that you are allocating your resources of time, people and money to your most profitable products, services, customers and employees.

Your accounting department should be able to create the Level 3 information for you in a couple of hours, depending on the existing structure. You’ll need to help them with the assumptions and allocations of overhead, employees and capital. You can do that in different ways.

The main point is to not constrain your management team to your existing accounting system or the information that your accountants prepare for you. If you ask for the “Level 3-The Pros” financial information from your accounting department, they should be able to build it for you.

You can use the templates above as a quick checklist. Which ones do you receive each month? If you would like a complimentary assessment of your internal financial reports, call us at 855-904-0087

Conclusion

Level 3-the Pros will provide very useful information for your entire management team. It’s powerful because it’s based on facts buried in your accounting and business data. You, literally, have gold hidden in your financial information.

**Tough Question **

Your best customers are probably subsidizing your worst customers. How do you (and they) feel about that?

From the Piggy Bank

Focusing on cash flow, which comes from margins and velocity and volume, will provide fuel to dramatically accelerate your profitable growth and business valuation.

Have a profitable week!