To start our journey towards understanding business success, we often overlook a vital tool: the profitability analysis. Yet, this oversight can hinder our ability to grasp our true financial standing.

Calculating Margins

Firstly, let's delve into the calculation of profit margins through conducting a profitability analysis. By comparing our sales revenue with associated costs or direct provision costs, we gain valuable insights into our financial performance. Take, for example, a theatre; revenue from ticket sales must be weighed against expenses like actor fees and stagehand wages.

Segmented Profit Analysis

Additionally, we need to analyze profits on a segmented basis. By examining different revenue streams within our business, such as productions versus workshops in a theatre or sit-down versus takeaway in a restaurant, we gain a deeper understanding of where our profits lie.

Client Valuation

Furthermore, we should perform client valuations to assess the value of each client segment. By segmenting clients based on demographics or ordering habits, we can determine the profitability of each group and allocate resources accordingly.

Historical Analysis

Consequently, it's essential to look at historical data to identify trends and patterns in our performance. This allows us to make informed decisions and understand our business's trajectory over time.

Benchmarking

Moreover, comparing our performance against benchmarks, whether they be our own expectations or industry standards, provides valuable insights into our standing within the market.

Benefits of Profitability Analysis

Performing a profitability analysis can alleviate anxiety about our business's financial health while pinpointing areas for improvement. By utilizing tools like BudgetWhizz, we can streamline this process and pave the way for future success.

Conclusion

In conclusion, conducting a profitability analysis is not just a task; it's a blueprint for long-term business growth. To learn more about optimizing your financial strategies, tune in to the "I Hate Numbers" podcast.

Useful Links

• Budget Whizz
• I Hate Numbers
• Numbers Know How

Are you certain / are you comfortable about the level of success you have achieved and are achieving in your business? Why not? There is a quick way that you can get an overview of your finances.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Not enough businesses, not enough companies, run what I call a profitability analysis. This is a defining indicator of profits. Now, such an analysis relates to the costs, an overall revenue, and by cost, we're talking about those revenue costs, those expenses, those cost of goods sold, those direct costs, and it can provide powerful insights into how your business is performing.

This analysis, whether it's done occasionally or regularly, indicates if it's time to make some changes to what you're doing for the benefit of you and for your business. It may be that some of your clients require too much time for the money they're paying for you. Maybe that means there's other opportunities from a financial and otherwise perspective that are waiting for you to take advantage of and to jump onto.

Either way, it should be one of your tasks to perform if you want to ensure long-term business growth, so you're not just here for this week and next week, but in a much more beyond. And to help you folks, there's a simple blueprint you can follow to do a successful profitability analysis.

Step one: calculate the margins. And when I say calculate the margins, I'm talking about calculating your profit margins. Two of the most important profit indicators in your business, two of the most important variables in your profitability analysis are your gross and net profit margins. Now, the gross profit of your business is by comparing the sales revenue that you're generating against the associated, what you might call cost of sales, or direct cost of provision.

Please do check out last week's podcast, where we had some examples there. Let me steal from that podcast episode a few examples. In the context of a theatre, for example, putting on its shows, the revenue that it generates in ticket sales, it has then direct costs, or cost of sales, if you prefer, which are things like the access fees.

There may be royalties that are paid out to the producers of that script. There may be stagehands who are hired for that particular performance. Those would be direct costs, and we can work out the gross margin that that show contributes. We can also look at the same thing for a bar, somebody in the hospitality sector, the cost of buying in the food and drink and the food that's being made

compared to the revenue that is generated, we'll give those gross profit margins. And when it comes to the net profit margin, you need to subtract all your expenses, what we might call your support costs or your overheads from that revenue, from that gross profit figure to get your magic number, the operating net profit margin.

So typically, if we take the theater example. We then subtract things such as the front-of-house staff, we subtract all management time, HR, and the like. The difference then will be the net profit, operating profit we've made. Likewise for the hospitality business, when it takes off the cost of the waiting staff, the cost of the advertising, the marketing, and the promotion, then it will be left with its operating or its net profit as well.

If you were to compare those figures in percentage terms, by the way, folks, as a relative number, take the gross or net profit that you've generated, divide it by the sell value, the revenue, and you'll get those figures in percentage terms. Both of those sitting side by side is useful. You must also take on board and take into account to look at profits on a segmented basis as well.

If we think about it, we offer a range of services. We've got a number of different customers and clients here. And we can put those into groups. Those typically are where we've got a suite of services, perhaps. Different products generate their own unique revenue stream. We can look at the revenues for each of those segments, each of those revenue streams, subtract the associated costs, and include the overheads in our calculation.

So if we think theatre again, you may have a theatre that does its own productions, visiting productions. It may have one-off shows that it's doing. It may also have workshops and other such activities. Those are discrete revenue streams. Identifying the profit for each of those revenue streams doesn't mean you'll drop anything else, but you have a deeper understanding how those elements work.

Likewise, in your restaurant business, your bar business, you can have a sit-down, take away, outside catering. All of those are discrete revenues. So what's step number two? Well, step number two is performing what's called a client valuation. Not quite like the house valuations. Now, here we look at each client.

And again, if you've got a wide client base, you might want to group and segment your clients by what they have in common. So again, if I refer back to my earlier examples for a theatre, it might decide that its client base is broken down into demographics, age groups perhaps, whether they're business audiences or audiences are drawn from general members of the public, whatever that would be for you.

And in your restaurant example, it's the same thing. It could be business clients, it could be individuals, it could be based on segments in terms of where the clients come from. What they're ordering, however you segment them, you're associating the revenue and the cost of each of those segments. Now what that means is, you're looking at the value to you of a client segment, or individually, if you've got that data,

take off the associated marketing, labor costs, travel expenses, etc. and you'll identify the segmented profit. Typically, you'll understand what it costs you to support that client base. Typically, you'll also get a better insight into where those sources of profit are, which ones have got a strain, which ones are top-heavy for resources required.

Cash flow is a very good indicator of something, but profitability tailored with that cash flow is powerful. So what's step number three? Well, step number three is to look at things historically. We're always looking in the numbers world for things like trends, patterns, how we performed, when we judge our own performance here, we get sucked into thinking a number in itself has a value when it doesn't.

You need to compare that to what's gone on before. The past may not necessarily be what the present looks like here, but it will still give you an indication of how it's performed over a period of time. There will be seasonal fluctuations coming in, so we can iron those out and actually have a look on a comparable basis.

If you don't have a yardstick to measure performance against, then you don't really have any context. You don't get any deep understanding. Step number four is about benchmarking, comparing your performance against something else. Typically, you can compare that to your expectations, your budget. You can compare it to other people in your sector, other client groups.

Comparing yourself to your competitors, people in a similar size business to you, gives you good insights. Now, you're not talking about emulating the competition, but having a benchmark, having a reference point is going to give you insights to how you're performing relative to something else. Now, if you're listening here thinking, Mahmood, that's all very well and good, but why do I do this?

Why do I need to do that? What are the benefits? Are there any tools and resources out there? The short answer is, it's a must, and a good profitability analysis can reduce the anxiety you might have when it comes to your business. And also, it gives you insights to what you can improve, what you carry on doing, that you're doing that is really positive and performing well.

And areas that you need to challenge, areas that you need to do better with. In terms of resources, please check out the links for things such as Budgetwhizz we have, a powerful online planning tool. There are other services, ways we can help with resources, more on a one-to-one basis, if you prefer. And remember, if you're finding your business lacking direction, remember this sort of analysis can help you

spot issues that you wouldn't otherwise see. It's a great tool in your business toolbox. Until next week, folks, happy analysis! We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.