Keys to Measuring Profit
Measuring profit is one of the most important deliverables you have as a strategic partner (aka Director of Operations). Profit is tied to revenue, but there’s so much more to it than just revenue.
Before you even think about building a dashboard for your client, you want to nail down what they want and need to see.
1 – Make Sure You and Your Client Are Measuring the Same “Profit”!
“Profit” seems like such an obvious word, but it may not actually mean the same thing to you as it does to your CEO. Especially for people who aren’t steeped in nerdy accounting terms, things like net income after taxes, profit margin, bottom line, take-home pay, or profit all seem interchangeable to them.
You can’t measure profit and take the best action if you’re not on the same page as your client. I’ve been in conversations where people were bickering over which number they’re looking at, and they never actually got to the taking action part.
No relationship can thrive without good communication, and that’s true for you and your CEO, too. Part of good communication means making sure you’re both on the same page.
So, do you know, without a doubt, what your CEO means when they talk about profit? Get clear with your client on what “profit” means for them. Is it a percentage of revenue? Is it what’s left over after paying expenses and taxes? The simplest definition, of course, is Sales – Expenses = Profit.
2 – Know How Your Client Wants to See Their Profit
Once you know what profit means to your client, now you can take that number and slice and dice it.
How do you present it to the client in a dashboard?
Do they want to see profit as a whole, or broken down into different segments of their business? My business, for instance, is divided into 1:1 services and digital Download n’ Done products. How does your client segment their business?
Do they want to see how it’s trended over time (like from January to December), or a deeper snapshot of time like a single month to get deeper into the details?
Do they need comparisons? Some people like to compare year over year and some like to see seasonality.
I like to do comparisons wherever possible because it gives context. $10k of profit is more meaningful when you look at it compared to other historical data- like what it was last month, or 6 months ago when it was $5k or $20k. Suddenly that $10k is telling a story of the business’ profit going up or down.
Similarly, percentages give you more information than a flat number. Let’s say that my client made $10k last month, but they had to sell $100k of products to get it. That 10% profit margin tells you a lot about how the business is doing and shows you that it may be time to revamp your strategy. (Especially if you know that a profit margin of 60% is great for your client’s industry.)
If you don’t already have a clear picture of what your CEO cares about, pay attention to the questions they ask you. You’ll notice in your conversations that they’ll tend to ask the same questions over and over again if they are still seeking the information they want. “What’s the percentage of sales?” or “How much did we make at this time last year?” That’s how I learned when I started out as a new DOO, and then I made it my goal to answer those questions before they get asked. Learn what they want and give it to them.
The answer to “how to show them their profit” can be different for each business and can change with seasons and strategic mapping refreshes.
Build your dashboards in a flexible way, so that you can flip back and forth as needs change.
3 – Get Clear on Meaningful Categories
Measuring profit in meaningful categories is important because the categories are what helps a data set (like all the details that add up to profit) make sense (see Do You Trust Your Data: 3 Ways to Be Sure). It’s really cool to get the profit drivers and financials measured in categories that line up with the 7 strategic objectives of business. This way you can drive more meaningful conversations, and therefore, more profitable actions.
That’s one of the big benefits of my dashboard that no other software can do (I still have yet to find another visualization tool that lets you customize financial results like this). It allows the user to select categories that make sense for their business. For example, typically, contractors or web developers roll up to the labor rollup in statements, but if it’s better for your business to show it under marketing or visibility, you can do that. Below is an example of this visual transformation from financial statement to dashboard.
4 – Take Action on the Information
This is the most important part of measuring profit! Take action on what you’ve learned.
When you measure profit, you’ll see where you’re spending the most/least and where your spending lines up with your strategies. You’ll realize that you spent $3k for blog articles for a launch (strategic) or that you’re spending money on software that you aren’t utilizing (not-so-strategic).
When you see what dollars are tied to what strategies, you don’t necessarily have to dig into P&L statements or QuickBooks all the time—you can already see what you need to do.
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