This post continues our discussion of key metrics that business owners should focus on to increase profitability. The information in this post comes from a newsletter published by Bill Billingsley, a business broker and owner of The CBB Group, Inc.
Below the Line Expenses
In the accounting world, expenses that occur as a result of a company’s major or central operations are classified as operating items. Items such as revenues and costs of goods sold fall under this category and are considered as “above the line” expenses. Expenses from peripheral or incidental transactions (such as gains and losses from asset sales, lawsuits, changes in market values, etc.) are classified as nonoperating items and are reported as “below the line” expenses below the EBIT line (termed simply “below the line”).
For business owners, measuring your below the line expenses as a percentage of revenue serves two purposes. First, it allows you to determine if your expenses are in line with current revenue levels and second it can be used as a supplemental measure of efficiency.
Business owners should measure the percentage of revenue that each customer represents. If any one customer occupies more than 10% of your company’s revenue, this can pose a risk to continued profitability. Buyers are particularly sensitive to this issue unless they are industry buyers who are knowledgeable about the customer base.
Understanding how profitable your customers are can take time and effort to determine, but doing so can lead to immediate increased profitability. An added benefit is the ability to build an ideal customer profile that allows you to better focus your sales and marketing efforts.
Like customer profitability, understanding the profitability of your products and services is essential to driving long term success for your company. Firing a customer or discontinuing an underperforming product or service can be difficult but may be far more profitable in the long term.
The metrics discussed in the last two posts may not all apply to your business, but measuring the ones that do matter can be the key to increasing short term profitability and long term success.