Everybody loves talking about soaring revenue. Doubling revenue, tripling revenue, and having such and such % better revenue than last year are all nice songs to sing. It sounds great to everyone. Prospects enjoy hearing about it. Your employees get a sense of pride. Your marketing and sales people have a field day with it. That song may even help you get “more revenue” this year. That’s all wonderful right? Well maybe.
Revenue is one of the many ways you can evaluate the validity and the competitive stance of a business. It doesn’t necessarily indicate how well a business is doing though. Any given organization can have a very decent revenue structure but what makes the organization valuable is the profitability factor. In other words, the bottom-line is what really counts.
What’s the Difference Between Revenue and Profit?
Generally speaking, the greater the revenue, the more profitable a company should be. That’s what is so misleading about revenue. People logically figure that if a lot of money is coming in, the company must be doing well. It is simply not the case. Owners and managers that make the mistake of assuming this are opening themselves up to a huge risk of failure.
There is nothing more disheartening than thinking you are making all of this money only to find that it has been a challenge comfortably meeting monthly expenses throughout the year. Often the error of assuming money is “tied up in Accounts Receivable” can mask the reality of the fact that you are not making enough money to pay your bills. From another viewpoint, at tax time, it can be rather devastating to learn that the year has actually been miserable. No bonus?
The good news is that all you really need to do is evaluate revenue vs. costs/expenses on an accurate basis all year round. Unless you have a precise picture of what is happening in your business constantly; what appears to be going on can cloud the actual image of reality.
How Can Business Analysis Increase Visibility of Profit and Revenue?
In order to capture a strong financial analysis on paper, it is important that you incorporate every aspect of your business. Additionally, it is critical to classify all elements so that they can be broken down into manageable pieces for study. Problem areas can be spotted more easily and action to address issues can be implemented for immediate correction.
It is likely that various managers of the organization would be responsible for the different elements, which is another reason why it is important to break it up. If you are not making as much money (profit) as you would like, then all financial areas must be considered so that appropriate measures can be put into place with the appropriate people.
Using Business Analysis to Understand Revenue
As an example, from a simple revenue point of view, you need to know where the revenue is coming from piece by piece. If you do temporary as well as direct hire, the first cut would be a split between these two types of revenue.
Next, do you do several types of placements within each of these groups (multiple lines of business)? Clerical, IT, Light Industrial, Accounting and Finance, etc. all need to be broken down into how much revenue from each.
After that, if you have multiple offices handling the business, break down by office. Within each office, you have different types of individuals participating in the generation of revenue. Break out business by individual.
Using Business Intelligence to Understand Costs
Once you have established exactly where and how the revenue stream flows, do the same with costs. Break out all costs in the same fashion. How deep you want to go with this will rely on how your business is structured and what you think will be meaningful for analysis. Some types of businesses need to break out more finitely than others. This is something that you will need to decide.
When you are considering costs, ensure that you include general office, selling and administrative expenses. Without inclusion of these, you still will not have an accurate depiction. Perhaps revenue is great but you are spending too much on certain items.
If you are unaware of where your big expenses are then it is unlikely that you will be able to trim expenses appropriately. You unquestionably do not want to cut expenses that are highly contributing to revenue or that would cause a problem in the generation of revenue. This is where breakouts become beneficial. Once broken out, costs must be compared and contribution to revenue should be researched.
As an example, can you be saving money if you were to switch your phone carrier? If yes, would the new carrier allow you to accomplish your sales goals? Do you need all of those accounting people? If you reduced accounting staff could the invoicing still go out accurately and in a timely fashion?
Is there something you could do or a tool you could use that would allow you to accomplish the same with less staff? What is the cost of the tool, length of implementation, ease of implementation and short and long term benefits? It is possible that by spending a little money now you can save a lot and significantly contribute to your bottom-line almost immediately.
What Should be Considered In Order to Forecast Probability?
Other factors to consider that will significantly add to the precision with which you can examine and forecast profitability are:
· % of business procured from given customers
· top locations in which business is generated
· top positions being filled within given periods
· top skills in demand
· lost business/why lost/% of lost
· top referral sources
Inspection of multiple factors that contribute to the revenue/cost breakdown is critical. It’s not all about dollars and cents from a certain standpoint. Trend analysis can be significant in determining any number of facts that will aid in the decision-making process that leads to appreciably more profitability.
Questions to Ask About Where Business Comes From
Let’s take a look at where business is coming from.
· Who are your top-ranked customers?
· How profitable are each of these?
· Is a customer that generates less revenue possibly more profitable for you?
· What % of business is acquired from each of your top-ranked customers?
· If a single top-ranked client were to leave you would that cause you to go out of business?
· Where are your customers located?
· Will that new phone service that saves you money adequately cover the locations that most of your business is acquired from?
· Which positions are being filled and how profitable are they?
· Are you spending your recruiting money in the right place?
· Which skills do you need to recruit more of because they are most profitable and in-demand?
· Where should your advertising dollars go to best benefit your company?
· Why did you lose that significant order?
· What can be done to prevent this in the future and thus add to the bottom line?
Answering These Questions is Key to Business Strategy
So, how do you acquire all of this extensive and valuable information? How can all of it be captured effectively and easily? If you are not getting this now, what’s the first step to implementation? Basically, the implementation may be easy or it may be challenging. All is reliant on what you have to work with at present.
Obviously, in order to view this type of information, the information has to be in place somewhere. Once it is determined that the data is available, getting it on paper shouldn’t be so bad.
Hopefully, an automated system is in place to run the business. Although one should never assume too much, one could generally assume that in the year 2022 businesses are automated to some extent. If an automated system is in place, it needs to be assessed.
Questions to Ask About Your Automated Business Systems
Which operations are currently automated? Are all clients, applicants, orders, and placements being made using an automated software tool?
If yes, in detail what information is being captured and more importantly what can be captured? It is less important if you are simply not filling in the information. As long as there is a place for it, you can certainly begin taking measures to format and fill in essential data.
Next, what about invoicing, payroll, accounts payable, etc.? Are all of these automated? This is where the numbers game becomes more important. These numbers are vital.
How Is Your Business Automation Set Up?
The key is setting up your automated system. It is a painstaking activity to come up with the classifications and then set all of them up in your system in a way that makes sense. Be careful not to over or under classify. A little investigation may be in order to ensure that the information will be captured throughout the normal flow of business activity. The data is plainly a bonus that spawns from proper use of your automated system. The training of users is extremely crucial to this process.
Data is Nothing Without Accurate Reporting
The project is a challenging task but well worth the effort. Otherwise, how do you know? The information is imperative to the successful operation of your business. Once the data exists, it is merely a matter of building the database and creating a means to report.
Reporting can happen under a number of scenarios. The typical means of reporting is with business reports that are printed. The data is sorted in meaningful ways and subtotals and grand totals are supplied where relevant. Reporting can also happen graphically. Pie charts, graphs and charts can be helpful to view specific types of data in a more pictorial fashion. Only some types of data can be tellingly reported in this way. On-the-spot desktop reporting in the form of a data portal is also becoming more popular. At the click of a button, orders, sales, payroll and other important statistics can be revealed instantly.
It’s exciting to recognize that you can know all about your business quickly and easily. Why leave something as important as profitability to chance? Invest time and talents wisely for optimal business success. Make sure your business data is as accurate as possible with a software solution like Ultra-Staff EDGE.