The previous post was all about the importance of actually measuring what is happening in your business and how simple that can be. This post is about the single most important item to track. Your profit.
You profit may be the easiest item to track – your accounting application almost certainly has a Profit and Loss Report. So you don’t have to do much other than read it (and take appropriate action, depending upon what it says).
The real importance of a focus on your profit is that a profit is what separates your business from a hobby. A hobby is something you do because you enjoy it, and most likely it costs you money. Your business has to make money, otherwise you eventually run out and then you close your business doors and walk away.
The trick is that you must consider profit every time you quote a price. That’s not saying that you have to be mercenary, far from it. You just need to consider your profit margin in every quote. Let’s look at that in more detail.
You have decided (you did think about it and decide, didn’t you?) what your profit margin has to be to cover your costs, provide you with a living and still deliver good value for money for your customers. So that’s your base.
Regular customer’s may be given a small reduction, meaning that they pay a little less each time but pay more often, meaning that you still make a good margin on their activity.
You might also decide to provide a good cause (for example a local not for profit organisation) with a reduced rate as art of your contribution to your community. If the profit on your other transactions allows it then you might even consider selling for at or near your cost price.
Then maybe your father-in-law hires you – maybe you consider that you need to sell to him at a little below cost!
The point is that reductions in the profit margin on one sale have to be supported by the profit on your remaining sales. Strictly speaking you don’t need to make a profit on every single transaction, and to that end you really should be thinking of the lifetime value of a customer rather than just the current transaction. It’s just that you need to keep in mind the food you need to put on your own table when you quote a price. Being in business means providing for your own family first, because if you don’t look after them first you can’t look after anyone else either.