A Benchmarking Tip: Compare Expenses Against Gross Profits, Not Revenue (Culpepper Report, July 17, 2003)
I talk a lot about helping you build profits, but (a) what are profits and (b) what ratios should you use to measure them. I've worked with companies who measured profits in every way imaginable, including profits against payroll, expenses against revenue, profits verse revenue, and at least ten other ways. I am sure you will agree, every company measures everything differently, but let me share one measure that has worked for my clients.
What are profits
Simply said, "Profits are what is left over after you have paid to serve the customer." Without profits you have to return for your effort, however, there are different types of profits. I won't go over each type right now, but I'll list the different types of profits for your reference: (this is not a technical discussion of profits, just a quick overview)
Profits are found anywhere that you get a greater return after the bills are paid. It doesn't matter as much what you call them, it only matters that you have them. (People tend to talk the most about things they don't have.) From the relationship prospective, profits are the reward customers give for excellent value.
Compare expenses against gross profits (the ratio of measure)
When you compare your expenses against gross profits you are looking at the input (what you spent) and the return produced. Revenue is an important factor because you can't ever earn more than 100% profit-- but it is the ratio of expenses verse gross profits that tells you how well you are using your available capital.
Now don't drive yourself into the insanity of "cost controls"-- consider any expense as a investment into a specific customer desire. Remember, it's the customer who provides the revenue-- so how can the least amount of investment create the largest amount of revenue. Every expense should contribute to supporting the customer. (Btw, Sometimes investing idle cash into R&D or capital investments produces a greater long-term return.)
This is why I talk about identifying your profitable customers, these individuals are most likely to generate a profit for your company. You may find a premium offering sustains your company better than a commodity offering. Some companies find entry level products qualify individuals for higher profit products. The key is to find the mix right for you.
I encourage you to take a look at Culpepper Report's article Compare Expenses Against Gross Profits, Not Revenue. This short article provides a comparison of ratios and further discussion about this means of measuring your profits in business.
/ achieving-roi | profitable-customers /
By Justin Hitt at August 19, 2003 2:01 PM Subscribe in a reader
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