15 Sep Understanding your revenue drivers
For any business to be profitable, it has to generate revenue. Everyone understands that a business produces revenue through usual business activities, such as selling products or services, receiving payment from your customers and so on.
The better you are at selling your products and services, the more money your business will be getting. However, what we often forget to ask ourselves is what actually drives these revenue levels and how do we control them.
Running a trading company means facing a variety of challenges, such as global recession, increase in online customer buying and the post-lockdown “new normal”. It is now more important than ever to understand exactly where your cash is coming from. This knowledge will enable you to better flex, manage and control your ability to generate income. It also helps you look at your business with a long-term focus, as you will be focusing only on the business areas that can sustainably deliver maximum revenue. Here are the important areas to consider:
- Revenue Channels - Have a look at your numbers and find out which channels generate you the most revenue. Does your income come from online stores and ecommerce or through physical stores? Perhaps your sales mainly come from a third-party retailer and selling to other businesses? You might be focused on a single channel or have a mixture of multiple channels. Nonetheless, really knowing where most of your sales come from is key.
- Revenue Streams - Your business’ total revenue is likely to be made up of a number of different “streams”. For example, if you run a coffee shop your revenue streams include selling coffee, pastries, cakes and lunch. You should know which of these streams you rely on the most and which give you the best returns.
For instance, you may find that the majority of your income comes from just 20% of your products. If that’s the case, it may be a wise decision to get rid of the products that are less profitable. Likewise, if you find that most of your service sales happen in one particular industry sector, perhaps it’s a good idea to focus yourself more on this specific market.
So, understanding your revenue streams will allow you to make some important decisions that can considerably increase your business profitability.
- Sustainable products and services - Do you know which of your products and services have been the most profitable in the business? And do you know which ones have been the least impacted by market changes or have adapted well to changes?
Diving into your metrics and finding the products and services that are the most productive and adaptable will give you a greater chance of generating constant and evolving revenue from your business. If Coronavirus has taught us anything, it is how important sustainable and stable revenue is for business survival.
- Volume vs Value - The absolute majority of businesses are operating on either one or the other: high volume of products / services at low margins or low volume at high margins. Based on this, you can make some changes that could help your business generate more sales.
For instance, is there a way for you to make your margins lower and create a more attractive price point for the customers? Or maybe you are able to increase the total volume and that way boost the revenue? You might find opportunities to diversify your business into new channels and streams, this way creating new sales and higher revenue levels.
Final wordTo run a successful business, you don't just need to know how to sell your products and services. It is essential that, as a business owner, you truly understand the ins and outs of your company. Knowing exactly where your revenue comes from, which of your products or services have proven to be the most profitable and sustainable as well as how your business truly operates is key. All of these things will help you find any existing gaps in your business and make some important decisions that will help you boost your profitability and growth even further.
Need expert business advice?
If you are thinking of boosting and increasing your overall profitability, but don’t know where to start, come and talk to us.
Here at Accounting Services for Business in Bournemouth, we specialise in helping businesses of all sizes make the best business decisions for their individual needs. We will explore your revenue drivers together, help you understand them and give you expert business development advice on enhancing your revenue.
To have a further discussion, Call us on 01202 755600 or drop an email to firstname.lastname@example.org.