PROFITABILITY: A GUIDED EXERCISE

See below for two guided exercises focusing on the profitability of your business, one more high level and the other much deeper. Additionally, we will provide real questions that you should work through during these two exercises. 

A GUIDED EXERCISE: ANALYZING YOUR PROFITABILITY (HIGH-LEVEL VIEW)

Pull your prior full-year P&L on a cash basis and calculate:

1. Gross profit ($): Sales − Direct Costs 

2. Gross profit %: Gross Profit ÷ Sales

3. Net income ($): Gross Profit − Overhead

4. Net income %:  Net Income ÷ Sales

Then sit with these strategic questions:

• Does your gross profit actually cover your overhead needs?

• Does your net income cover the real cash needs of the business - debt service, owner draws, reinvestment?

• How do your gross profit % and net income % compare to what's standard in your industry?

• Do you have room to raise prices on what you sell?

• What's your gross profit % goal for next year? Your net income % goal?

• Is there room to pay less for direct costs without meaningfully hurting what you deliver to customers?

This exercise alone tends to surface where the real problem is — whether it's pricing, cost structure, or overhead that's grown faster than the business supporting it.

GOING DEEPER: PROFITABILITY BY CUSTOMER

The high-level view tells you whether you have a profitability problem. A customer-by-customer view tells you where to focus. Several clients have used this exact analysis to identify which relationships were worth expanding — and used the resulting clarity to justify and secure increased annual subscriptions or contract values from their best customers, because they could finally show, in hard numbers, which accounts were actually driving margin.

How to Build It

1. Export the detail behind your sales and direct expenses. You need transaction-level data, not just the P&L summary.

2. Build a file that calculates gross profit customer by customer. Same formula as before — sales minus direct costs — just broken out on a customer basis.

3. Layer in allocated overhead per customer. This step is an art, not a science. There's no perfectly objective way to split rent or admin salaries across customers. If you bill or pay hourly, hours worked per customer is a reasonable and defensible basis for allocation. Pick a method, apply it consistently, and don't let the search for a perfect allocation stop you from doing the exercise.

Strategic Questions Once You Have It

• Look at the results and identify your winners and losers. Which customers should you discontinue serving, renegotiate, or reprice?

• Does it look like your overhead is too heavy to sustain with your current gross profit? If so, what's the fix — more sales, or cut costs?

• Based on your overall gross profit % and net income %, how does that trickle down to a single transaction? Does the math on an individual sale actually support the business you're trying to run?

THE BOTTOM LINE

The two exercises above should provide you with the data to answer real questions about your business and provide a pathway to improve your business's bottom line.

NEXT STEPS

Identify 3 action items from the above exercise, identify who from your team will spearhead it and provide due dates to make sure it actually happens. Set time on your calendar to refresh the above analysis on a monthly or quarterly basis to monitor the results of what you implement.