Getting your business mix right

Why is it vital to get the business mix right?

Let's look at an example of a business with three categories. They could be:

1. Three different product or service lines.

2. A couple of key customers and a 'pot' of smaller customers.

3. Retail, trade, agency or website sales.

Figures are all £000s.

What do we know about the business?

The client knew that they were losing money, but didn't know why. Worse still, they didn't know how to address this.

This is an extremely common situation. The worst case scenario is that the client continues to increase sales, and losses increase.

What do we know after analysing by category?

It's clear that the client has two profitable business streams with higher gross margins, and a third unprofitable stream with low margins.

What do we recommend?

Increase sales in Categories 1 and 2 (the most profitable). Stop category 3 sales.

Profits jump even though total sales are unchanged

Direct costs are reduced. Even though total turnover (sales) stay the same, profit is higher. There is a £150,000 swing in gross profit. It jumps from 29.2% to 41.7%.

Waste is reduced

With lower direct costs, overheads can remain constant as they are not required to support Product 3. This means resources are not wasted.

Next steps

Make sure you have a breakdown of profits of each part of your business or type of sale.

Check that you're making the profits you expected when you priced each product or service. Get the balance of your business right. It may well be the case that you need some low-value sales to bring in higher value work, but don't allow these to damage your business.