Are You Maximizing Profits, or Caught Up in the Short Term?

Posted on June 7, 2020 | Author: Doug Phares

For individuals running a franchise, it’s pretty easy to see if you’re maximizing your profits. Usually you can get information from your parent company and see how you stack up. Many times people working in a diversified industry can find a trade association to provide similar guidance. But if you’re operating something a little more niche, well, you’re going to need to do some work.

First things first: Don’t just use year-over-year comps as a barometer for your current success. I understand the temptation, but only looking at last year (or period) removes a lot of your objectivity. Maybe one year was poor due to inclement weather, some odd world situation (COVID, anyone?), or maybe your industry saw a market bump.

The ideal is to benchmark against similar businesses through consistent time intervals. By seeing how you stack up against your look-alikes and/or competitors, you remove these variables and get a balanced look at whether or not your business is performing well for its industry. Even better, try to do this by looking at the information through long periods of time.

I’m a big fan of trade associations as they often expose you to a pool of similar businesses and often across enough territory that you are not direct competitors. If you can find such a group, see if they offer benchmarking services. If not, consider looking for chat groups or topical blogs and reach out to people there. Some of the most impactful work I’ve seen done can come from informal circles of a dozen or so business owners doing a confidential exchange.

If you’re not comfortable sharing hard data, find a third party (an accountant, perhaps someone at that association, perhaps just a neutral member) who will collect percentage trending and anonymize it for you and then share it back out with the group.

Often the value of such exchanges shows up in the balance of business—how much a place makes on certain lines as a total of their whole and then in trending through time. What is growing and working for the others, what are they shifting out of, and what new areas of income suddenly start showing up? Now, let’s talk about how you can make these meaningful comparisons.

If you can keep at this for a year or two, the history and trending starts to be meaningful, and often you develop relationships with people who will start to be more candid with you.

I already covered the value of taking a long-term view of things, so take this as a practical example of how you can use that approach to create a productive afternoon. During my time in the corporate world, we all obsessed over quarterly performance and overanalyzed numbers. We’d spend heaps of time working and re-working our data, stewing on it and really trying to understand it...and then we’d forget about it by next quarter.

Exercises like this let you skip that headache and look at larger trends in your business model. Once you’ve done that, you can see what areas need shoring up and what projects are best left in the past. If you see an uptick in business in six months or a year, start the process over again. There’s a good chance you’ll find yourself with five more percentage points on your margin, and who doesn’t want that?

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