Have you ever had the experience cruising down the Interstate, you put on your turn signal and start to changes lanes, suddenly you hear a loud horn and swerve back in to your lane to avoid an accident. You had a car in your blind spot. Thankfully, you were able to avoid a collision.
The same is true in business. You’re about to make a change. Maybe it’s a new product or a new market. Maybe you’re thinking about hiring that person you’ve been putting off for a while. Maybe you have an opportunity to buy a business that’s right in your sweet spot. When you’re making these types of decisions it’s important to know what is lurking out there in your financial blind spot and how can you avoid an accident in your business that could cost you significant time or money.
- New Products and/or Geography: You’ve probably heard the saying “count the cost” before doing something. New products or geographic expansion typically require people to sell, manufacture and distribute goods and services. It would be nice if you could expand without adding people, but it’s unlikely. It’s a good idea to create a projection of how long it takes the new product/market to get to breakeven and then turn profitable. The total cost to get to break even is your investment and the profit you make will be the return on that investment. Is it worth it?
- Your Mix of Revenues is Changing: Not all product/services carry the same profit margin. Your gross margin is either creeping up or down and you haven’t noticed that your mix of revenues has changed. It’s important to understand what’s driving your changes in gross margin by breaking out your gross profit by product/service. You could be increasing volume in different products/services vs in the past or maybe you had a price increase in certain products or services. Whatever the change is, it’s not only important to understand what’s going on, but why.
- Your Overhead is Creeping Up: When times are good and the business is expanding, we tend not to look too hard at our overhead and when those expenses start creeping in to our net profit margin, sometimes we just don’t notice. It takes a significant downturn to get our attention. As part of monthly business review, take a hard look at your net profit margin and determine what’s going on with your operating expense. Have you added people, that aren’t creating efficiencies that improve your profit margin? Are insurance costs rising and you haven’t been able to pass on those increased costs to your customers? Have you spent more than normal on marketing, which haven’t really paid for themselves? Looking at each significant expense category and comparing it as a percentage of revenue over time can give you an idea as to which expenses are increasing. Again, it’s also important to know what has increased and why it increased.
