In this month's CFO Services guide from Ignite Spot, we're going to show you how to determine if the economic engine of your business is broken. Once you understand how to apply this test, you'll be on your way to making more money.
What is an Economic Engine?
An economic engine is the thing that drives the financial life of your company. Without it, you wouldn't be able to keep your doors open. As an engine, it also propels your business forward.
What is the one thing you do that generates actual income? It's a simple question, but I need to ask it because businesses lose sight of it all the time. As we grow, we stop focusing on this activity and instead get distracted by HR manuals, taxes, and employee feedback. All of these things are good, but they don't generate income. They're not your economic engine.
Start by identifying your true economic engine. Now list all of the distractions that pull you away from that activity as a company. Are they worth it?
CFO Services & Calculating True Costs
It's not hard identify what makes money in your business. The more difficult task is calculating the true cost of that activity. This is where we determine if your business model works or not.
You don't need CFO services to help you calculate this. However, that's one of the key areas a good Chief Financial Officer will hone in on.
To calculate true costs, you will need to identify every expense incurred as a result of your economic engine. Let's look at Ignite Spot again. Take our accounting services for example. When we offer that service to a customer, we incur several costs including accounting wages, taxes on those wages, software, etc. If we didn't sell outsourced accounting services to a company, we wouldn't have to pay those expenses. We wouldn't be in business for very long either, but that's a different story.
The difference between your income and your cost of goods sold is what we call gross profit.
Good CFO Services can help you to identify what other businesses in your industry are doing as a gross profit. If you're only at 10% gross profit while others in your industry are at 35%, your business is probably broken.
Can a Broken Business be Fixed?
Absolutely. In the above example where the company is generating 10% compare to the 35% industry average, there is some ground to make up. You do this by either increasing your prices to match market standards, or you lower your costs because you're paying more than your competitors.
But we're making a profit, you say. Sure. But if you really are operating at 25% below your industry, you're either not as good at what you do, or you're running a charity instead of a business.
Remember, it's not a sin to ask for profits. That's how a company survives in the long-haul.
Within your business, there's an economic engine that generates both income and expenses. Once you understand the ratio of those two figures in comparison to your industry's average performance, you'll know if your company is conquering the world or falling a part behind the scenes. It's an important exercise to run through. Working with outsourced CFO Services can be a great way to get the ball rolling if you're not sure where to start.