The world of business faced considerable challenges last year, and it’s forced us to reevaluate the nature of work in numerous ways. That being said, there are principles of business that have remained true before COVID and that hold now, and one of them is the #1 thing you should be focusing on more than anything else: focusing on your cash cows.
In fact, it’s actually more important than ever to get this element right as we enter this economic recovery period. With that in mind, here are four things you should know about focusing on your cash cows.
Not All Products Are Created Equal
Business is filled with hard truths all around, and accepting those truths often means the difference between incredible success or spectacular failure. If there’s any truth I want you to accept right now, it’s the fact that not every product is guaranteed to make money.
Not all products are created equal, and that’s not necessarily a reflection of the strength of businesses themselves—that’s just the nature of the world in which we live. There are products out there that don’t make much profit and no amount of money you throw at it (marketing, manufacturing, or otherwise) is going to change that. If you’re reading this with the intent to turn around sales of a product that isn’t doing too well, this isn’t the way to go—there’s a much better way.
Just as there are products that naturally don’t make a profit, there are products that make MOST of the profits. These are your cash cows—the products that make most of your money, the ones that keep your business afloat. They may even be what your business is best known for. They’re natural money-makers, and if you want to increase your profits, you should be focusing on your cash cows above all else.
Ignoring Your Cash Cows is Costly
Do you know what your cash cows are? If you don’t, you need to do some homework. Crack open your books and take a look at what’s bringing in your greatest profit margins.
Before we go on, there’s something I’ve talked about previously that I want to make very clear: sales DO NOT equal profits. Just because a product has high sales numbers doesn’t mean it’s making you a lot of money. In fact, many businesses sell products that LOSE money.
I’ve had struggling businesses come to me to ask where they went wrong, and after I did the math, it turned out that they were inadvertently pricing their products below cost. Factors like manufacturing and advertising costs can cut your profit margins, and if you’re not careful, they can easily bring you into the negatives.
It’s here that many business owners start to slip up on costs. Instead of focusing on their cash cows, they bank on products that actually lose them money, and the results are catastrophic. If you’re focusing too much on low-profit products or services, trouble is right around the corner and approaching fast.
Get the Most Out of Your Cash Cows With This Winning Formula
You know you need to focus on your cash cows, but in a practical sense, how do you determine which products are the ones you want? How will you know what your cash cows are without knowing the costs behind them? The answer is a simple formula that calculates your gross profit. If you’re not familiar with it, you should do so now:
Sales Price – Cost = Gross Profit
Your Sales Price is what officially goes on the price tag, essentially what your customers are paying. Cost, however, is a much wider umbrella, covering aspects like manufacturing costs, advertising costs, logistical costs, and others.
Gross Profit, your final number, is what you should really be paying attention to. The higher, the better. If it’s in the negatives, you’re losing money, and that’s a problem. Whatever your highest-grossing product is, that’s your cash cow, and you need to put most of your resources into making the most of it.
Let Me Give You an Example
I’ve worked with many restaurant owners over the years. There was one in particular that came to me for advice, and I gave them the same advice from above to calculate their gross profits and focus on their cash cows. They were reluctant to do this, as calculating this formula for every single item on the menu seemed, to them, an exhausting, time-consuming, and ultimately fruitless endeavor.
I maintained that this was the best option at their disposal, but in the meantime, I suggested that they implement the 80/20 Rule (I spoke about that a few weeks ago) to their top-selling items. They settled on that method, and they left the meeting satisfied with their plan.
Several months later, they came back to follow up. As it turns out, they applied the Gross Profit Formula to their top-selling items, and it turned out the numbers weren’t what they expected. This revelation drove them to actually flow through and apply the same formula to every item on the menu after all! Once they did this, they were able to completely reevaluate their business model, fixing numerous problems at once and seeing a dramatic increase in profits. All it took was sitting down and going over the numbers.
It should go without saying that this entire process can be extremely complicated, and if you don’t know what you’re doing, you can get overwhelmed fast. My best advice here is to hire a CPA to handle the heavy lifting for you. Even if you know enough to do the calculations yourself, an expert can do it quickly, easily, and often times get you better results, all while taking a load off your mind.
If there’s anything I want to leave you with today, it’s this: do your homework—calculate your gross profits, adjust your models accordingly, and shift your focus from your low-profit products to your high-profit products.
You’ll see a very real difference sooner than you think, and if you stick to that formula, you’ll be better equipped to do business than a shockingly high number of entrepreneurs out there. Of course, if you need help doing the math and figuring out where to make adjustments, don’t hesitate to reach out to me.