Do you know how much money you're making every time you make a sale? Are you clear about your sales targets? When running your own independent creative product business - understanding your profitability is key.
I'm going to give you 3 reasons why you need to be really clear about this figure, why you need to work hard to understand your profitability and why it's so important to your business.
1. Are you making enough profit?
You need to understand your profitability because there's only one place in your business where you make any money - that is the difference between what you buy an item for and what you then sell it for.
Everything else in your business - your overheads, your salary, your expenses - has to be covered by those costs, so if you're not making enough money on every sale, then you won't have enough cash coming in to cover all the other costs plus make a profit.
2. Being aware of 'extra' costs
It's easy to make bad decisions or decisions that harm your bottom line if you're not really focused. Understand exactly how your profitability changes according to the types of product that you're selling, the places that you're selling or the sales channels that you're using. For example, the packaging you're using might actually be really expensive and eat into your profitability - you need to be aware of this so you can make changes when necessary.
Make sure you can account for every cost in your business and then ensure it aligns with how much you need to make.
3. Enough cash flow
The first 2 reasons bring me to 'cash flow' - you need enough cash flowing through your business to enable you to make a profit.
You can only have enough cash flow if yo understand your profitability - how much money you make with each sale and what business costs you incur that impact your profits.
If there's not enough cash coming into the business you are unable to pay all your overheads, buy new stock, expand, attend events - the list goes on.
If you want to know more about the subject, I've just released in The Resilient Retail Club the first two modules of a brand new course for members called 'Grow your Profits' where we go into more depth.
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