You can analyze a company’s profit and loss to see why they aren’t profitable, why they aren’t as profitable as they could be, or most importantly why they aren’t as profitable as they SHOULD be. You start by analyzing sales:
Based on your analysis, you can increase sales and/or you can increase your gross profit.
If the strategy is to increase sales, you’re probably looking at spending some money on advertising and marketing. Depending on your product or service, this can be anything from PPC (Pay Per Click) advertising to “Influencer” marketing. However, with Instagram’s latest influencer change, you’ll have to do your research and stay on top of the trends.
This is the point where your CFO consulting services should separate itself from the marketing department. You should recommend your client hire someone who knows how to create a marketing and SEO plan in today’s world for their specific industry and their goals. Keep in mind, you’re a CFO, not a marketer.
You should know your limits, and don’t step out of your zone – even if you think you have some knowledge. The key word is “some.” Just like you are singularly focused on providing CFO consulting services, you want someone who is singularly focused on marketing for the best results.
Increase Gross Profit
This part remains almost entirely in the CFO wheelhouse. The only way to increase gross profit is to decrease COGS (Cost of Goods Sold). There are two ways to decrease cost of goods sold: better supplier pricing and volume discounts.
Pricing is the easy one because you can shop around for the best price but this option can be limited. With the recent trade war with China (regardless of your political leanings) there’s a good chance your COGS have gone up (assuming of course your suppliers are in China).
For example, one accountant shared that her client is finding comparable products with better pricing in Malaysia. There’s a good chance your suppliers are going to come back and justify discounted pricing based on volume which brings me to my second strategy.
This is a great way to get better pricing. It will definitely decrease your COGS IF you can sell all of the inventory so this has to be analyzed carefully. If you wind up writing down obsolete inventory because it won’t sell, you not only don’t succeed at increasing gross profits, you actually decrease them.
The other downside to this is that you’re tying up cash in inventory. You’ll have to take a close look at cash flow to ensure you can sustain the extra cash in inventory to take advantage of a volume discount.
This also means you will need a good understanding of your inventory turnover number. Then you might incorporate another strategy around increasing inventory turnover. Usually this goes back to a good advertising and marketing strategy to sell more product in less time.
The other side of increasing net income, after increasing gross profit, is to look at expenses line-by-line and see where you can reduce it. You can run a monthly expense report by vendor summary to see where you are spending money regularly. Oftentimes, this yields information about apps and other things we’re spending money on that we aren’t really using.
There are also often opportunities to call companies to attempt to have subscription fees reduced. A few months ago, I personally did this with several companies and saved a few hundred in monthly fees, which can add up quickly.
Why all the above might be worthless
Along the way above I’ve mentioned a lot of analysis that can and must be done in order to increase a company’s profits:
- Gross Profit
- Net Income
Analyzing the above will be critical if you’re going to help companies increase profits.
Here’s the problem!
Almost every single company that walks in my door has inaccurate and unreliable financial information. If I am basing any of the above analysis on books that aren’t bulletproof, then all of the above is useless. How can I increase a company’s gross profit when I have no idea where I am starting? If there are items on the P&L that belong on the balance sheet (ie. Fixed Asset purchases that were expensed), my net income is inaccurate. If inventory isn’t recorded correctly or completely, then I have no idea what my COGS is, and also no clue what my real inventory turnover looks like. In short, before you can go out and offer CFO consulting services to a company, and claim to be able to increase their profits, you have to be able to clean up the books first.
The books must be bulletproof in order for your CFO consulting services to be useful.
In order to help with this, I recorded a 17-part video series on how to clean up a company in QuickBooks Desktop for Qbox users! Sign up here!