Profit Management in Small Companies

Small companies generally have a significant advantage over global ones in terms of flexibility, innovation and speed to market but suffer a big disadvantage in available capital. The capital I'm talking about is not so much financial variety but intellectual. Crowdsourcing can help in a variety of disciplines to offset lack of human capital, from product innovation to leadership skills to sales. When the subject turns to comprehensive approaches to optimizing profitability, the specific uniqueness of an individual company's internal structure makes the crowdsourcing option less viable.

Virtually every accountant and CPA I've met see profitability through standard cost accounting approaches. For small businesses especially those standards fall short.

In larger corporations there is a budgeting concept sometimes called "fully burdened". Simply, costs carry not only physical costs (direct product, labor and freight).but also fiscal ones (direct and indirect overhead, loads to offset underperforming brands or divisions, etc.). Margin (M) calculations are based on selling price (sp) minus cost (c) divided by selling price or M = sp-c/sp. Thus getting accurate cost information is key to margins and profitability management.

A former client developed a sophisticated yet simple program available online called "Your Cost Center" at www.yourcostcenter.com. I preferred 'your profit center" but that didn't fly.

It forces business owners, especially those driven by hourly productivity, as in service businesses such as health care, construction, accounting, legal and consulting, to build into costs paid vacations, sick days, owner income goals (for wealth creation), taxes, insurance and related intangibles not often included in costs. The program helps owners determine how many more jobs (units) the company needs to sell to meet profit goals, analyze pricing alternatives and helps guide other strategic decisions.

This is not a promotion for the service but a recommendation that business owners rethink how they envision product / service cost and pricing.

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