Can you
identify where all the income for your business comes from? There are four main
components that every business receives income from. These are:
1. Margins
2. Pricing Structure
3. Costs
4. Expenses
One problem
for many companies is that they set themselves income goals, but then these are
not met. It is far easier to find out where your money is coming from first.
You can then work on improving each area separately.
Basically a
revenue stream is defined as a source of income. Having multiple income sources
will make your business more profitable. If one stream declines due to economic
turndowns, another stream can be ramped up to replace that lost income.
Having
multiple streams makes your business stronger, and this means that you can
survive when other businesses will have to shut down. A great example of having
multiple incomes streams is a mall owner. They rent out each individual store
to different business owners. If one business fails, they are still receiving
rental income from the other stores.
If you are not
sure of where your revenue is coming from then create a detailed spreadsheet
and start tracking your income. This will help you identify your most
profitable area.
You may
discover that most of your income comes from running promotional sales. Or you
may find that your expenses are much higher than you anticipated. One way to
increase your revenue is to raise your prices, or combine certain products
together and offer a two for one type of special.
Keeping
track of your costs is important if you ever want to turn a real profit with
your business. You definitely want to be getting your costs back plus be making
a profit at the same time. If not, then you seriously need to look at your
pricing structure in more detail.
Another
area that you should not overlook is your margins. Your margins determine how
successful and profitable your business is. The best way to measure this is by
using your gross margin. This is the sales price minus the direct material and
labour costs that were used to produce the product, divide this by the sales
price.
You also
need to take into account things like overhead expenses such as rent. The more
costs you factor into your calculations the better your overall picture of
where you business stands will be shown.
By now you
have a good understanding of how to identify where your revenue is coming from,
and how to calculate your margins.
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