Profit-drivers: How do they help your business grow?

As a business owner, you probably have a destination in mind – a certain revenue number, a certain exit date, a certain percentage of growth. That’s the first step in creating a dynamic forecast: to decide where you want to go and how fast you want to get there. 

But when I say destination, I don’t actually mean something like, “Grow 10% next year.” There’s no strategic way to make that happen – or to know if that’s a realistic goal whatsoever.

That’s why we take a profit-focused accounting approach, which essentially means focusing on non-financial profit drivers: things that can be consistently controlled and monitored through clear metrics that are then used to determine the revenue forecast.

If you’re an ice cream shop, the number of scoops sold is how you drive profits. If you also offer ice cream making classes to locals or rent out part of your deep freezer to another business, each of those will be a key profit driver. Each profit driver will have its own direct costs: The cost of goods for each scoop sold; the time spent planning and giving the ice cream class (as well as any associated marketing expense); the fraction of the space in the freezer.

By breaking down all the parts of how a business makes money and what direct expenses are associated with the various revenue streams, we determine what levers they can pull to reach their goal.

Rather than focusing on a revenue number, say, “I need to hit $200,000,” we can look at the product or service mix, and set and track measurable goals. 

Let’s say your ice cream shop has the goal of selling 600 scoops per month at $3 per scoop for a total of $1,800.

Right away, you get a quick reality check. If you need to sell 600 scoops to meet your goal, but you’ve never broken 300, then you need to have an incredible plan in place to double your sales – or you need a more obtainable goal. Or let’s say it turns out that the average price of ice cream in your area is actually $4.50. Well, now you only need to sell 400 scoops to get to the same $1800.

There’s more than one way to get to your target number, so maybe you can lower your sales target slightly — if you shave off some direct costs. If you’ve hit your ceiling on ice cream sales, you can look into diversifying what you sell or boosting revenue through your classes or rental space.

Once those goals are in place, there’s rarely a surprise when it comes to financial performance: If you come close to those numbers, you’ll be hitting your cash flow forecast. Blow past them, and you’ll exceed your financial goals; if you don’t quite get there, you know you’ll have work to do to catch up, or you’ll need to adjust your forecast downward. 

Forecasting leads to important conversations about your businesses’ performance, as each month gives you a new chance to check in with what’s happening, way before you close the books on the year and come up short: Are you having a record-breaking month? Is sales volume up due to seasonality or a successful new initiative that expanded your customer base? Are sales down because a storm knocked out power for a week or because a new competitor opened across the street and now you need to adjust your marketing or risk losing market share?

Breaking down these revenue streams also gives you a chance to:

• Evaluate the profitability of each stream to focus business strategy

• Shift your product/service mix, as well as related decisions around hiring, marketing campaigns, etc. 

• Compare your profit margin with industry benchmarks

• Adjust pricing strategy

• Communicate goals to your team

Once you map out the logic of a forecast, you can play with changing different variables to see how it impacts your bottom line on your profit and loss statement, as well as your cash in the bank. Instead of saying, “I need $200,000 in the bank,” you can focus on selling more scoops. When you hit an obstacle, you can take a moment to figure out if it’s a one-off problem or a deeper issue. Rather than just boosting top-line revenue, this approach allows small businesses to increase profit and, along with it, cash.

If you'd like to learn more about how we develop forecasts for our clients, check out our Virtual CFO Services below.