Understanding Profit In Your Ceramic Business

CONTROLLING YOUR CERAMIC BUSINESS

Part 1, Understanding profit

By managing profits in your ceramic business like a pro you secure a prosperous future.

We all think we understand what profits are. It’s one of the most used terms in everyday life.  However, for a ceramic business owner it helps to dig a little deeper to find out how you should look at profits and all its implications.

What is profit?

You need profit to survive, grow and prosper, in business. Therefore, making a profit is totally necessary. This leads to your need to understand –

Where it comes from, and

What influences it

In simple terms, profit is the difference between cash in and cash out, adjusted for changes

1. to your current assets (inventory, customer receivables and other short term assets)

2. to your long term (or fixed) assets such as equipment you need to run your ceramic  business (kilns, wheels, molds, shelving, furniture and much more).

Understanding this thoroughly means that you always – and I mean always – make your business decisions thinking about their influence on your profit.

This is the fundamental reason why you must have a reliable way of seeing and interpreting correct figures presented to you by your accounting system or your accountant, and making decisions, based on the same.

There are few experiences more exciting than those of understanding profits in your own business and see your efforts reflected in a profit-and-loss statement and a balance sheet.

Showing a profit also means that you can assess a value to your business. In most cases, if someone would like to buy your business, its price would be set based on its profit – also referred to its “bottom line” (line at the bottom of your profit and loss statement) – with a multiplier applied to it.

We will deal with this aspect in future articles.

Your accounting system

It would carry far too long to describe an accounting system in this article. Broadly stated, it does not matter which system you use, as long as you understand it, can manage it correctly and consistently, interpret the figures, or have someone that can explain them to you.

This means that when you select a system, you might need someone to help you understand it and implement it. With a computerized system normally comes a ton of on-line guidance. An experienced friend can be a real asset in this process. Also, check with your accountant and get his/her opinion.

There are several computer systems on the market today. You might already be familiar with and prefer one that you know and like. Then gradually make it work better for you, create new accounts when you would like to do so and keep up with changes for your own growing demands. Your accountant should keep you updated on tax law changes.

If your system consists of handwritten papers that you also trust, that is fine too. The main thing is that you have a system, know how to enter your figures and keep your records up to date. It’s an ongoing chore that should not be neglected. Neglecting it is dangerous. Make it a routine to update it frequently – mark your calendar and do not skip.

The most tragic experience I have in this regard is a studio that called me and lamented the fact that she and her partner/husband had just decided to close their business as their figures “showed them how much money they were losing.”  Her statement puzzled me as I knew their business, had respect for their technical competence and knowledge and – upon visiting her – noticed a busy studio with what appeared to have a very good following.

I asked for her to mail me the year-end statements put together by her bookkeeper. She did and I spent some time reviewing them. Then it dawned on me: Her bookkeeper had accounted her cash lay-outs for re-sold products as an expense. There was neither additions to, nor sign of, an inventory account for this category. I called her asking her to send me an estimate of the value of her re-sold products kept in inventory. She did and after making a rough adjustment, adding the value of this account, her business showed a nice profit.

I pleaded with her to get a professional accountant.

The absolute need to manage profit

To repeat – if you don’t make a profit, your ceramic business will not survive. Even if you could borrow money to keep it afloat, this would be a short-term band-aid. Eventually you will not be able to borrow, and you would have to close your doors and deal with your debts.

The reason why you need a profit is not only to survive but to force you and guide you to making decisions as to what is your best way to increase your gross- and net- profit margins. Profits are your compass to indicate if you are sailing in the right direction. Depending on in what direction the needle points, you get the signal to adjust your profitability.  It you do not take action, your business is at risk.

How do you increase profit and how fast?

1. The fastest way to increase your profit is to increase your prices. You get the immediate benefit from a price increase the moment you start selling at a higher price. This is why pricing is so overwhelmingly important. Making the right decision is also complicated and only you, as the business owner, can make that decision. Pricing requires study and analysis as to which products you increase the price of and by how much. If you increase prices too much, your sales volume will go down. If you leave them alone your sales will not be impacted – but you have not achieved the desired result: To increase your profits. To read more about pricing go to Marketing, Part 2, Pricing for profitAction: Make pricing a daily concern and job.

2. The second fastest way – and the most used one – is to increase sales. Here again, it requires decisions on marketing and selling.  Only you can move the needle in the right direction. Also, efforts to increases sales cost money, so you only get the benefit of the net result.

Increasing sales must be part of your daily management of your ceramic business. It must be ingrained into any business owner’s philosophy and approach to leading the way how the business is transacted. This runs deep and will be dealt from other angles in later chapters. Here, let’s focus on the concept and management of profit. To read more, go to Marketing, Part 1 through 4. Action: Build sales expansion into the very fiber of your ceramic business

3. The third way is to decrease the cost of goods sold. This implies reviewing your sources for what you sell, negotiating with your suppliers, lowering your freight costs and – when possible – eliminate products with unprofitable margins. This process also takes time, but pays off handsomely.

You should also make use of temporary lowering of costs through suppliers “specials” and other means. Action: Make managing the price of bought-in products an ongoing concern.

4. The fourth – and slowest – way to increase profits is to control and keep a lid on your expenses such as rent, taxes, salaries to your employees, cost of electricity, phone, internet, heating and cooling your business area, and a host of others outlays. It’s tough to do, but doable over a period of time. Even rent is negotiable – but it may take a long time. Please refer to: The Overhead Monster, Part one.

Although the process is slow, you will be amazed at the immense impact this controlling effort will have on your profitability. Action: Be constantly vigilant about these overhead costs. I have not encountered any business where these expenses could not be lowered – over time and with effort.

Conclusion.

Think about profit as suggested: Your compass to safe sailing. Profit – whether net profit (bottom line) or gross profit (sales less costs of goods sold)becomes the factor that guides you to the right decisions and steers you to success.

A final word. Managing profits takes guts. All decisions are tough. At the time you make them, you may have butterflies in your stomach. BUT – not making them is not an option. Take my word for it.

Plus – the more you do it, the easier and more self-evident your decisions will feel and the easier it gets to make a habit of it.

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© 2011 by Rolf E. Ericson, Oneonta, New York, publisher. All rights reserved. Photocopying, reproduction , copying, or redistribution of any kind in printed or electronic form is strictly prohibited without written permission from the publisher.