Which Customers + Services Make you Money?

Guest post by WebinArt Mentor Mahmood Reza.


Highly qualified and experienced in accounting, business and tax, Mahmood is an accountant and numbers rock star, helping businesses to use their numbers to survive, grow and prosper. "I love the arts sector and have over 35 years knowledge and experience of working for, and within the sector."


On 17th November AT 11.30 am, Mahmood will be hosting a live webinar for WebinArt members, delving further into understand which customers and services make money. Want to join the event but not a member? Join our Evolve membership now from £4 per month and cancel at any time - https://webinart.teachable.com/ (Please ensure you select the Evolve membership option).

Customers and Making Money


Not all customers and services are created equally. Some will generate high sales value, but make little or no profit, some will generate low sales value, but good profits, it sounds crazy doesn’t it. Let me tell you by the way, focusing on sales alone is a waste of time.


Making Money


Let’s talk about money. You need to be serious about making money in your business, by money we mean profit. If you're not serious about making money, then you've got a hobby on your hands.


Is your business a hobby? Do you see your business as making money for you?  Making

money is about making profits, this should be one of your key goals. Making money is not

your only goal, and you shouldn’t just chase the money. However, if you don’t make money then you cannot build a sustainable business, pay yourself decently, have time away from your business and your enjoyment of running your business may be tarnished.


Profit Types


Let’s talk profit. There are two main profits gross profit, and net profit.


Let’s get back to the heart of the topic, what does gross and net profit mean, what’s that all

about?  Here’s an easy way to look at it -


Gross Profit


For example, Serena sells artwork from home at £5.00 each. Now if she sells a hundred of

those, then she ends up with £500.  That £500 is her sales, but it’s not her profit.  Serena

needs to spend £100 first to use for art materials for the hundred drawings. This means that

she gets a £400 profit.  That £400 is her gross profit.


Let’s look at other examples.  If you are a retailer business, the difference between the cost

of buying stock and selling it is gross profit. Where your business is a food business, the gap

between the cost of making a meal and selling it is gross profit. If your business is a training

business, the difference between course fees and room hire and materials is gross profit. 

For a manufacturing business the product selling price minus the cost of making it is the

gross profit.


For the record, gross profit is also called gross margin, and the costs of buying the art

materials is called cost of sales.


Net Profit


Serena, our artist above made a gross profit of £400.  Life would be wonderful for Serena if

she could keep all of that for herself.  However, business life is not as comfortable as that

and there are certain costs Serena had over and above the costs of cups, lemons, and sugar.

There are the costs of printing flyers, insurance, and paying herself.  The cost of all this is

£100, this leaves Serena with a net profit of £300.


Customer Profitability


Figuring out the true cost of a product or service is an important exercise for your business’s

future. Are your customers profitable, should you continue, where are your energies best

served.


The needs of your customers can vary radically. In your efforts to keep your existing

customers and attract new ones, you can be drawn into providing widely different levels of

service and time spent.


These have one thing in common, they all have associated costs. Many businesses do not

know the true cost of trading with these customers, or even with customer groups. Certain customers may attract so much cost that they provide no profit contribution at all.

In addition, you may be unaware of the true value your customers place on the level of

service you provide. Under such circumstances, you may be trading at a loss with certain

customers, giving them a costly service which they do not actually require.


Activities


Activities in a business do not occur spontaneously - they are triggered by other events.

These events are important because they drive the activities and the costs associated with

them. By identifying the cost driving factors and understanding the chain of events they

trigger, you can measure the cost of processes as they occur in your business.


For example, when a sales order is raised, some activities will occur in response, such as an

internal production order, delivery note and invoice as well as the activities associated with

the manufacture and delivery.


Cost driving factors are therefore particularly important in calculating product/ service costs

and customer costs. Typical customer driven overhead costs are bespoke products, special

delivery requirements, discount terms and payment arrangements.


To establish the profitability of individual customers three factors are considered

  • The profile of customer revenue, gross profits, and discounts obtained by analysing sales by product and customer

  • The unit product, customer, and service costs

  • The trading activity profile for each individual customer.


Customer Profitability


Having established these factors, the profit margin provided by each customer can be

determined, therefore giving a true measure of its value to your business. This helps you to

look at different ways to improve the financial contribution of your least profitable

customers and services.


For example, do the results in the customer needs survey suggest any elements of the

service that could be reduced so as to lower costs? Can discount terms be varied in a way

which selectively penalises the least profitable customers and rewards the most profitable?

Can unprofitable customers be shed so they become a burden to one of your competitors?


One Answer


The ABC approach recognises the following:

  • The need to generate product costs that more accurately reflect the factors which drive them, such as variety and complexity - not just how many of them.

  • The need to match the cost of differing levels of service to your customers in order to establish true customer profitability.

  • The need to be able to identify opportunities for improvement.

  • The crucial importance of the key business processes.

The focus of ABC is on accurate information about the true cost of products, services,

processes, customer segments and services.


Activity Flow Chart


The first step in analysing activities is to draw a flow chart of all activities undertaken to

deliver your service or make your product. Having done this, the second step is to categories each activity and the time spent.


Cost Driver Analysis


In order to determine the cost of each activity it is necessary to determine how time is spent

and how costs build up. For example the profitability of your customer or service will

depend not only on the price and costs of the products purchased, but also on such factors

as the number of orders placed in a year, the amount of time spent supporting that

customer and so on. This means that costs will have to be traced to this customer from all

over your business, not just form making the product or delivering the service.


The power, insight, and knowledge of knowing which customers and services make you

money is numbers gold.

On 17th November AT 11.30 am, Mahmood will be hosting a live webinar for WebinArt members, delving further into understand which customers and services make money. Want to join the event but not a member? Join our Evolve membership now from £4 per month and cancel at any time - https://webinart.teachable.com/ (Please ensure you select the Evolve membership option).


Follow and connect with Mahmood here -


https://www.proactiveresolutions.com

https://www.facebook.com/proactiveresolutions

https://twitter.com/mahmood_reza

https://www.instagram.com/mahmoodnumbersrockstar

download (12).png
Arts_Council_England-1.jpg
download (15).png
download (19).jpeg
download (16).jpeg
download (18).jpeg
PRIVACY + COOKIE POLICY  | © 2019 CREATIVE LEICESTERSHIRE

GET IN TOUCH

Click HERE to see the contact details of our team, or email creative@leics.gov.uk

  • Facebook - Grey Circle
  • Instagram - Grey Circle
  • Twitter - Grey Circle
  • LinkedIn - Grey Circle
  • Facebook - Grey Circle
  • Instagram - Grey Circle
  • YouTube - Grey Circle