Know Products, Increase Profits | Jobs In DE

Know Products, Increase Profits

By: Alison Hinson

Your top selling product is not necessarily your most profitable one. In fact, it might actually lose money when you add up all of the expenses to make, market, and sell it. Knowing exactly how each of your products contributes to your bottom line can help increase the profitability of your business.

Tracking Revenue, Expense and Net Income

Many companies track revenue by product, but don't track the expenses to manufacture, sell, and support the product. They know how the product impacts the top line, but not the bottom line. These companies are only focused on one aspect of the business (revenue), but neglect two other profitability drivers: expenses and net income.

Most accounting software can easily be set up to track these for each of the products and services you offer. This will give you the basic information you need to begin understanding how and why your business makes money.

Let's look at two products offered by the Acme Company:

Revenue Only

  Product A Product B Total
Revenue $10,000 $20,000 $30,000

The revenue line may fool you into thinking that Product B is the money-maker of the company.

But look what happens when all of the costs for each product are tracked:

Net Income

  Product A Product B Total
Revenue $10,000 $20,000 $30,000
- COGS $3,000 $14,000 $17,000
Gross Profit $7,000 $6,000 $13,000
- SG&A $3,000 $4,000 $7,000
Net Income $4,000 $2,000 $6,000

If you only look at the revenue line, you would probably think that Product B is the star of your company, without realizing that Product A is the real money-maker of the business.

Better Analysis with Reports

Your accounting software has many ways to report financial information about your products. Use these reports to better understand the profitability of your business. For example, the following table shows percentages for Products A and B.

Percentages

  Product A Product B Total
Revenue $10,000 100% $20,000 100% $30,000 100%
- COGS $3,000 30% $14,000 70% $17,000 57%
Gross Profit $7,000 70% $6,000 30% $13,000 43%
- SG&A $3,000 30% $4,000 20% $7,000 23%
Net Income $4,000 40% $2,000 10% $6,000 20%

Questions to Ask

Looking at the percentages for each of your products raises some questions:

Product A

  • Is it possible to increase sales of this product, since it generates most of the income for the company?
  • Why is the SG&A percentage higher for Product A than Product B?
  • How much would net income go down if more money were spent marketing this product?

Product B

  • Why is the COGS such a high percentage of revenue?
  • If you can't decrease the COGS, should you raise the price of the product?
  • Should you switch your marketing efforts from Product B to Product A?

Knowing more about your products can help you make more money. Use your accounting software to track expenses for each product. Use product reports to help you figure out how to increase the profitability of each product and your company.


Alison Hinson has over 20 years of experience helping business owners make intelligent decisions with their money. She provides corporate programs to help employees better manage their personal finances. In addition to consulting, she frequently writes, speaks, and creates webinars about various financial topics. Alison is the host of Money Talks, an award-winning radio talk show on WMPG, and co-host with Debi Davis of Mind Your Own Business, a show dedicated to all things small business, on WLOB.