Three measures of profit a business needs to know.

August 5, 2009 · Filed Under Key Performance Indicators, Small & Medium Businesses · Comment 

Often we have a measure of overall gross profit and net profit of the business but there are three profit measures we need to pay more attention to.

These are :-

  1. Profit that each product or service contributes to the business
  2. Profit that each customer contributes
  3. Profit that each job,task  or sale contributes

Overall profit of a business could hide a lot of things. There could be products / services, customers or jobs that are unprofitable. If we armed with the information then we can make decisions.

Some years ago I was involved in a project for a business where the profit per product was measured for the first time. There was 242 products and the project found that only 72 of these were actually profitable. There were another 45 that were marginal which meant that maybe with some improvements these may become profitable but the rest were unprofitable. This business had been providing a large number of products which were costing the business even though overall the business was profitable.

All customers are not good customers. A good customer is one who is profitable and a great customer is one who also refers people to our business. But the business needs to know the contribution of the customer to the revenue and profit. Businesses need to get rid of the unprofitable customers so that focus can be given to the great customers to build that relationship.

Lastly there may be jobs or tasks within a product line offering that are not profitable. With this information we can then determine how to make this more efficient or to make changes to the product / service offering.

All businesses need to know these three measures of profit.

What are your thoughts?

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