How to Tell Which Parts of Your Business Are Actually Making You Money

Here's a question that makes many business owners uncomfortable: Do you know which parts of your business are actually profitable?

One of the most expensive myths in business is that all revenue contributes equally to your bottom line. The truth is far more nuanced:

• Some services might bring in lots of revenue but leave very little profit after expenses

• Some clients might pay you well but require so much time that your effective hourly rate is minimal
• Some products might seem successful based on sales volume but actually have razor-thin margins

Without clarity on these differences, you might be:

• Promoting your least profitable offerings
• Spending marketing dollars attracting your least profitable clients
• Working hardest on the parts of your business that reward you least

Why Most Business Owners Lack Profit Clarity

If understanding profitability is so important, why don't more business owners have this clarity? There are several common reasons:

• Traditional bookkeeping often doesn't track profitability by service or product – It focuses on overall business performance instead
• It feels complicated – Many owners assume they need advanced accounting knowledge to figure this out
• It requires intentional tracking – Your standard reports won't automatically show this information
• It can be emotionally challenging – Sometimes we avoid profit analysis because we're afraid of what we'll discover

The good news? Getting this clarity is simpler than you might think, and the insights can be transformative for your business and your stress levels.

A Simple Framework for Understanding Your True Profitability

You don't need complex spreadsheets or accounting software to get started with profit analysis. Here's a straightforward approach any business owner can use:

• Different services you offer
• Various products you sell
• Different types of clients you serve
• Different sales channels you use

Try to break these down into 3-7 main categories. Too many will make the analysis overwhelming, while too few won't give you enough detail.

Step 2: Calculate the Direct Costs for Each Revenue Stream

For each category, identify the direct costs involved in delivering that service or product:

• Time costs: How many hours do you or your team spend? (Multiply by an appropriate hourly rate)
• Material costs: What supplies or materials are required?
• Contractor costs: Do you pay others to help deliver this service/product?
• Software/tool costs: Are there specific tools used only for this offering?
• Commission/payment processing: Are there fees specific to this revenue stream?

Step 3: Calculate Your Profit Margin for Each Revenue Stream

For each category:

1. Take the revenue generated
2. Subtract the direct costs
3. Calculate the profit margin percentage (profit ÷ revenue × 100)

This gives you the percentage of each dollar that remains as profit after covering the direct costs of delivery.

Step 4: Compare and Analyze the Results

Once you have profit margins for each category, arrange them from highest to lowest. This simple sorting often delivers immediate insights about where to focus your energy.

Ask yourself:

• Which offerings have the highest profit margins?
• Which have the lowest?
• Are you spending most of your time and marketing budget on your most profitable offerings?
• Are there low-margin offerings that could be improved or phased out?

Common Profit Analysis Mistakes to Avoid

As you explore your own business profitability, watch out for these common pitfalls:

1. Forgetting to value your time

Many business owners forget to include their own time as a cost when calculating profitability. Even if you don't pay yourself an hourly rate, your time has value and should be factored into your calculations.

2. Only looking at dollar amounts, not percentages

A service that brings in $5,000 might seem more valuable than one that brings in $1,000, but if the profit margins are 20% vs. 80%, the smaller service actually contributes more to your bottom line ($800 vs. $1,000).

3. Ignoring emotional and strategic factors

While profit should be a major consideration, it's not the only one. 

Some lower-profit services might be worth keeping if they:

• Lead to higher-profit work
• Provide stable, predictable income
• Serve your mission in important ways
• Bring you particular satisfaction or joy

4. Making drastic changes too quickly

Once you have profit clarity, it's tempting to immediately eliminate your lowest-profit offerings. Consider testing price increases or process improvements before completely eliminating services that your clients value.

5. Doing this analysis once and never revisiting it

Profitability can change over time as your costs change, your efficiency improves, or market conditions shift. Plan to revisit your profit analysis at least quarterly.

One Simple Exercise You Can Do Today

Here's a quick exercise to get started with profit clarity (this takes about 20 minutes):

1. List your top 3 services or products
2. For each one, write down:
   • The average revenue per sale
   • The approximate number of hours it takes to deliver
   • Any direct costs involved (materials, contractor fees, etc.)
3. Calculate the approximate profit for each
4. Divide the profit by the hours spent to find your "effective hourly rate" for each offering

This simple calculation often reveals surprising insights about where your time is best invested.

Remember: You don't need perfect numbers to gain valuable insights. Even a rough analysis is better than no analysis when it comes to understanding your true profitability.

Moving Forward with Profit Clarity

Once you understand which parts of your business are most profitable, you can make strategic decisions about:

• Where to focus your marketing efforts
• Which services or products to feature prominently
• How to price different offerings
• Which processes to optimize first
• How to package your offerings for maximum profitability

The result isn't just better financial performance – it's also reduced stress and increased satisfaction as you focus more of your energy on the work that rewards you appropriately.

After all, the goal isn't just to be busy – it's to be profitable and fulfilled by the work you do.

Need help gaining clarity on your business profitability? At Goldstar Bookkeeping, we help business owners understand exactly which parts of their business are most profitable, so they can work smarter, not harder. Reach out anytime for a friendly, no-pressure conversation about how we might help.