Is Your Business Really Profitable How to Find Out

Welcome to the Creative Mind Smart Money Podcast where we turn financial confusion into creative confidence. I'm Samantha Eck, the keeper and fractional CFO for creative entrepreneurs. Each week I'm sharing my financial expertise and actionable strategies to help you build a thriving creative business. Plus you'll hear from industry experts who bring fresh perspectives on growing your business beyond the numbers. Because building a successful creative business starts with strong financial foundations. Your next chapter starts now. You're listening to the Creative Mind Smart Money Podcast and today we're going to dive back into some of the really cool CFO type reports that we want to look at and analyze when we are working with bookkeeping or just things in general. We really want to get a firm grasp on these reports and understand them and understand the benefits of them. There is ways you can do these yourselves. That's not really what we're talking about here is how you can do it yourself. We're more talking about the benefits of running these reports and when you need to reach out for help of these reports. So today let's dive into profitability. When you're bringing in consistent revenue but your bank account still feels like it's kind of like a revolving door and you're asking yourself where is all my money going? That's where profitability can really come into play. So I'm going to talk to you today about what it is and how it helps you stop guessing and start making smarter, more profitable decisions because that's the whole point of a profitability analysis. So what is a profitability analysis? First of all, it's the process of figuring out how much profit you're making after cost expenses team and tools and it's basically per offer. So it's not just like I random type of thing. It's how much profit you're making per offer, per client, per project, per month. There's a variety of different ways when you look at profitability. It's not just at the end of the day. It's not just saying, okay, like here's my revenue, here's subtract all my expenses. Here is my net income. It's much deeper than that because you don't just want to know if the business is profitable. You want to know what's profitable inside of the business. Like what is actually profitable? A lot of times what I talked about before was how I'm someone who's anti-cutting. Like I don't want you to cut off all your subscriptions. I don't want you to cut off everything and we really dove deep into that in one of my past episodes where we talked about that and one of the things that we talked about doing was making sure that we are actually one of the things we were talking about doing is making sure that we are actually profitable. And that's what we're going to really deep dive into this. So when we look at profitability, yes, we want to make sure that business as a whole is profitable. But what we also want to analyze is if our offer is our profitable. Now what I mean about that is if our offer is profitable is looking at let's say you're offering a social media management package per month. What goes into the creation and the making of that social media management package? Do you have contractors that you're working with that are working on a specific with specific clients on that specific project that is going into that offer. So that needs to be considered as is this offer profitable? What kind of software are you using for that offer? How many hours are you using for that offer? And then once you combine all of that and you kind of look at all of that, that's how you really figure out if that offer is profitable. And then it goes similar to the client. Yes, you have the offer, but then you have the client. Maybe you've noticed that you're doing more hours on a client than you typically would do for the offer that they're in. So then you're analyzing how much profit per client you're making. And if that actually makes sense, same thing with profit per project. And then of course your profit per month. So you're not where we have all of those different aspects that kind of combine into things and can allow you wiggle room. Because let's say you discover that you are under charging a client and you've been under charging them for months. Now you have the ability to go back to them and say like, Hey, I ran an analysis on your charges. I'm actually doing more work than I initially planned. We need to raise your prices and knowing that in order you have to do that in order to stay profitable and in order to make sure that your business is actually functioning like it could. Could you imagine finding a thousand dollars extra in a profitability that you did not have when you were considering cutting your V8. That's a thousand dollars a month. Now you have an extra thousand dollars a month because you just looked at your profitability. So that is the real power of a profitability analysis. So of course, why does it matter? Again, I've kind of already went over this, but why does it really matter? Because without a profitability analysis, you're going to be under pricing your best offers. So you have this amazing package that you put together and everything goes into it, but you are underpricing it and you don't know if you're actually making money on it based on the hours you should be putting in based on the software that you have, based on the contract that you're working with. You're going to be underpricing it yourself, not only just yourself, but you're underpricing the work and the value that's going into that work. Of course, you're going to hold onto those unprofitable services out of habit because you feel like they're making your money, but realistically, you've never looked at it and you've never analyzed if they are actually making your money. So you're holding on to them out of the thought that, okay, well, I don't want to let go of the service because it could be making me money, but do you actually know? And that's the power of that knowledge. And then of course, scaling something that's secretly draining you. So if you have something that is costing you more than it is to actually run me offer, you could be scaling it and being like, yeah, this is a great offer. Like I have so many people that are on this offer, so I'm just going to keep selling it. But then secretly, it's draining your cash and it's draining the life out of you because you don't have that. So obviously that analysis is going to help you know where to double down. So maybe your most profit, your would you consider your most profitable offer is actually your worst profitable offer. Like it's really bringing in the least amount of money, but the one that you thought was your least profitable is your most profitable offer. Now you can be like, okay, I need to double down on this offer because this is the offer that's actually making me money. So of course, that's something that's really like powerful about this. You can help you spot sneaky expenses that that are eating into your margins. And I know that I've talked a lot about like cutting subscriptions and things like that, but this is different, right? Because when we look at what we're profitable per offer, or we look at it for profitable per client, or if we look at it for profitable per whatever it is, that becomes a little bit more like, okay, you know, I don't think we need this software for this offer. Are we using this software anywhere else? No, we should probably cut that software out. So get a little bit even more strategic with softwares and things that you're using. And then of course it helps you to get really strategic with pricing delivery and team capacity. So once you run that profitability analysis, maybe you have someone who's slightly faster at a task, then the other person that you currently have on that project, maybe you switch them around and you can understand that, okay, so this person is faster at this. I'm going to put them here and that person there. And it's going to help you with your capacity of your team, but it's also going to help streamline things and make it more efficient. Make your delivery just that much better. And then of course, again, your pricing is going to get better because you're going to understand the full picture of what goes into each offer and like how everything is produced. It's the, as a bonus, it's also the first step to owner's pastability because you're making sure the offers are profitable enough so that you can make sure that you at the end of the day get paid, okay? So now we're going to go into what is part of profitability. So these are three part profitability formula. So for each offer or client or project, first of all, the things you want to look at are what they paid you or like the total for the service. So if you have a $5,000 a month social media package, that is your top line revenue. Then you want to look at your direct costs. And if you're a service provider, of course, your direct costs are going to be different. They're going to be things like contractors. They're going to be things like tools and software that you use only for this service. And I want to be clear on that when we're talking about profitability, we're looking at things that are only for that service. So we're looking at if your social media manager and you social pilot for your whole business, you know, we only want to calculate the percentage of that social media like software for that package. So for example, if you have five different packages, you're only calculating how many clients are on that specific package. So that percentage of your clients, that percentage of that subscription cost will then be used to calculate that direct cost. Then you have your paid, like if you have ads, if you have printers, travels shipping, whatever goes into the direct cost of producing this service or product, whatever it is. Then you want to ask yourself the time, how many hours did you or your team spend on this specific project per month? Because again, you want to look and make sure that you're actually maintaining profitability and that the people that are doing the work for you are actually profitable. So then you ask, okay, what's the net profit? What is the revenue minus our direct cost? And then what's your effective hourly rate? Which is your net profit divided by your total hours? So to give you a real world example of how this can kind of work. So let's say you charge $200 for a branding package, your website, your brand designer, you have $200 for a branding package. You spend $300 to have a subcontractor do some of the work on that. You have $100 on a dobi sock and that's 15 hours of your time. So that's $1,600 that's net minus all your expenses, which means your effective rate is 106.67 per hour, which is great, but what if you'd spent 40 hours instead? That means that your rate would have been like $40 an hour, which is like, ugh. So it's really getting down to the nitty-gritty of it and look a K, is that the hourly rate that I want? And I know a lot of people are like, don't charge hourly, don't do hourly, don't you don't have to charge hourly. I'm not asking you to charge hourly. You need to know your hourly rate even if you aren't charging hourly because you need to utilize that to understand your profitability. And that's where we're talking about that. And the reason that we want to really just make sure that we're we're talking about it. So obviously we want to also talk about some common pitfalls that can really put a damper on our profitability, which are things like scope creep. So people that are creeping outside of the scope of the project that you've initially had, that kills profit because if you're spending 40 hours on a project that you were only meant to spend 15 hours on, that can obviously really harm you. And then of course over delivering without charging more. This is a hard lesson to learn because we all want to deliver and go above and beyond for our clients. But when we over deliver, we are technically under charging ourselves, right? And then tools and subscriptions that will bloat your overhead. So, of course, really analyzing those things and making sure that we're not having that bloated overhead cost, not tracking time. So when we do profitability, one of the first things that I will always tell my clients is that we need to do a time audit. So tracking what you're doing, that sounds so ridiculous. And honestly, I used to think it was ridiculous to whenever someone would be like, "Od it your time, audit your time." You need to know what you are doing and what your team is doing at all times. This is not like a micro management thing. It's not to say, "Oh my gosh, Jenny over here, she spent three hours doing file management or whatever it is." It's to understand how much time and like experience is going into each project and that's going to help you be profitable. This is not for you to be a micromanage or I'm saying, "Okay, well, why did she spend three hours on this project when it should only take in her two hours?" You know, that's more of an internal process that needs to be worked on if that's what you're noticing. But it's more to say, "Okay, this takes her three hours. We need to make sure that we're accounting for that three hours in our costs." And then, of course, underpricing based on what you think people will pay. So you think, "Okay, someone's going to pay me $200 for this package. Instead of the $2,000 I want to charge." So, of course, that's going to kill you. Your profit as well. So, when do you want to do a profitability check? Like, when is the best time to do one? Obviously, we want to look at this monthly. When we look at our total big picture, it's that overview. We want to look at our revenue, our direct costs, and then our expenses. Now, a lot of times for service Fridays, that's a lot harder to understand, especially when you have so many different packages, so many different things going into it. But that's one of the things. And then, obviously, quarterly, you want to analyze your top three offers, your top five clients, or your biggest time drains. Analyze that and understand who is working and who isn't. And then, of course, after launching something new, hiring, or changing pricing, you want to make sure that that profitability is continuing to stay in check. So, if you have new things coming up, just checking on that. Okay. So, what do you do with the information that you've garnered from this profitability check, from this profitability analysis? First of all, one of the things you want to look at is cutting your low margin offers, or alternatively not cutting those offers, raising prices, reducing scope, or privatizing them, to you make sure that you are getting what you need out of those offers without overdelivering, or without underdelivering. You want to re-evaluate your contractor rates, first of all, what clients are paying. So, if your clients aren't paying what you need them to be paying, either your contractor rates need to go down or their clients need to pay more. And that's where you have to really start to compare the two and really look at them. Obviously, shifting the market towards high-profit offers and saying, "Okay, I need to focus on shifting your marketing and saying, I need to focus on this really high-profit offer." Of course, adjusting time allocation for your team to focus on high-return tasks. Maybe you do the low-return tasks faster than your team does. So, have them focus on the tasks that are high-return instead. Whatever that is, or you have someone who's really fast at high-return tasks, have them focus on that instead. And then, of course, paying yourself on what's profitable, not what's left over. So, if we're seeing that kind of profitability come in and we're seeing ourselves be profitable, making sure that we're actually getting the pay that we deserve as business owners. So, I want to remember that profitability isn't just a number of things. It's also about helping you create those healthy boundaries and understanding, you know, if you're overdelivering on something, if you're underdelivering on something, like, where is your business really making money and where are you not making money? You don't just want the money that's left over. You want to earn well for the energy timing creativity that you pour into your business. And that's why we want to run this profitability analysis. So, it might seem really silly because you might be like, "Okay, well, why would I pay monthly for profitability analysis?" But realistically, you want to look at everything on a monthly basis to make sure that you're consistently staying profitable. Because maybe your system changed last month. And now, something that took you two hours is only taking you 20 minutes or it's taking you four hours instead of two hours. You want to consistently be on that to know if you need to shift or adjust. Obviously, doing quarterly price raises or changing things quarterly is more agreeable, but you still want to have that no one on a monthly basis that you can consistently understand if you need to change things so that during that quarterly time, you can analyze things deeper. Okay, so you don't need to be a numbers person in order to do these profitability analysis or understand it. You just need to ask the right question about your offers. If you found this episode helpful, please leave a comment, share it with a friend, leave a review on Spotify or Apple, wherever you're listening to. And of course, please make sure to leave me a suggestion if you are interested in hearing about a specific topic. I would love to hear that. You want to learn more about profitability. You want to do a profitability audit together. Feel free to reach out to me, send me an Instagram message, a threads message with the word profit and say that you heard this episode and you just really want to talk about profitability. And let's kind of walk through that. We can also get on the discovery call, whatever feels best for you. But remember, what's most important is just understanding your numbers and utilizing them to make yourself have a better business. Okay, as always, I wish you the best week ever and we'll see you next week. Farewell, fellow travelers.