by John Gross
Everyone knows their revenue (or sales) number. Fewer know the costs to deliver or produce the product or service they provide to customers.
Understanding your basic numbers lets you make better, data-driven decisions. Also, when you don’t understand your conversion costs, it is tempting to adopt a ‘Topline is Everything’ mentality. When this occurs, getting the sale is everything regardless of the costs (and resultant profit).
Conversion costs are the costs to create the product or service that you are selling. They are made up of the cost of goods sold (COGS) and overhead costs. By understanding conversion costs, you can determine your cost drivers and rank potential improvement opportunities based on their improvement potential. (Remember the Pareto principle – work on the biggest one first!)
Understanding costs also lets you evaluate the profitability of your offerings and your customers. With cost knowledge, you can answer the questions: What are our profitable offerings? What are our unprofitable offerings (or dogs)? Who are our most profitable customers? (Many business owners have been astounded to find out that they are making little or no profit on their largest or “best” customers!)
Armed with this information, you can make data-driven decisions instead of relying on out-of-date or anecdotal information to challenge your beliefs on how you make a profit. There are no right or wrong answers. The only rule is Revenue – Cost = Profit!
If you don’t understand your costs, then as an old boss of mine used to say: “You may be leaving money on the table.”
John Gross is an EOS Implementer who helps businesses achieve Vision, Traction, and Healthy. You can contact John at John@ DrivingChangeInc.com or call 636.667.0579.