Why and How to Understand Your Costs
Most business owners understand their costs in a very broad sense. They know that their cost of sales is usually around 60% of revenue, or that their material costs are 21%. But what can you really do with this information? The kind of information you need to drive improved performance requires some analysis.
Break down your business into product lines, customer segments, geographic segments, and any other metric that makes sense. Within all of these segments or categories, identify your best and worst. Then put initiatives in place to improve your overall profitability through this analysis.
The insights gained from this analysis are typically of one or more of the following varieties:
- Data to identify and focus on most profitable customers, segments, product lines, etc.
- Help sales team focus on most profitable product lines and customers.
- Identify areas/segments that need improvement.
- Identify customers/segments that consume an improportionate amount of resources.
- Adjust pricing in areas that do not meet acceptable profit levels.
Some of the benefit will be simply gaining a better understanding of your costs and profits by the various segments. That by itself is tremendous. But the greatest benefit is using the information to establish initiatives to increase profits and revenue. Once the analysis is compiled, establish an action list of the items and areas that need improvement and specifically how you plan to make it happen. Review your sales activities and plans, and make sure your people are focusing on the right mix to deliver the optimal level of profits for your organization. This is what using numbers to drive business decisions is all about.
This is an ongoing process and mindset, not a one-time exercise. You need to re-analyze your costs and re-formulate your plans at least every 6 months. Doing so always results in improved focus and performance.
About Gateway CFO Solutions, LLC:
Based in St. Louis, Gateway CFO Solutions helps small businesses grow profits and revenues, and bring peace of mind to their company’s financial picture through part-time CFO services. Many small business owners are without a trusted advisor for the financial side of their business, and they have seemingly few resources to turn to for expert guidance. We provide that guidance and act as a trusted, strategic advisor for our clients. We provide both broad, global planning and “roll up the sleeves” technical services.