Are you making a profit?

It sounds like it might be a very basic question - but actually this can be a bit more complex than it might appear.

First things first - let’s define profit.

Profit is where you generate more income than you spend. It sounds straightforward?

For many businesses, profit isn’t being accurately tracked.

A shop owner may spend £2,000 on a consignment of stock. This should not be written to the profit and loss, unless you are going to sell the whole consignment straight away.

If you are buying 4,000 golf balls at a cost of £0.50 per golf ball and selling at £1.00 per ball - and you sell 600 a month - you should write in sales of £600 - with a cost of £300. That gives you a profit of £300.

What we often see is the whole lot being put to the profit and loss - you will get £600 in income, but a whopping loss (because of your cost of £2,000) of £1,400.

If that is replicated across all your stock - and you are buying and selling stock lines every month - it becomes really difficult to work out if you are actually making a profit. And if you have lots of stock lines - it can be really difficult to work out which ones are making the right margins, or are selling well.

There are tools in Xero (Products and Services) which can help you track inventory like this. It’s a straightforward set up - but allows you to actually see what stock lines generate good margins. That’s useful information - so you can use that data to know if you need to take action - to order more, increase your prices or ditch the product.

The same principles apply with services.

If you sell time and expertise - do you know how much time your staff actually spend delivering billable work? This is not a performance management exercise - but a means of providing insights.

Once you know time, then you know cost. And the same principles apply as with golf balls!

You may deliver a project over two or three months - or possibly even two or three years.

However you choose to invoice that client, I would suggest that you release that income in line with the time you actually spend delivering the work.

Follow us for more tips on profit. We’ll have some worked examples, some things to consider - and then we’ll look at the levers you can pull to increase profit.