From “what should I sell?” to your exit strategy.
Questions and decisions you may face as your small business moves through its life cycle and the management accounting techniques to help with those questions and decisions.
- What product/service do I sell most?
- How much should I sell it for?
- How do I increase revenue?
- Concerned with revenue of the business
- This provides information to make decisions about what product/service to offer and how the quantity of what you can and do sell is affected by your pricing decisions and changes.
- How much does that product cost to make?
- Measures the Cost of Goods Sold
- How much profit do I make when I sell the product/service?
- Gross Margin of the Business (Revenue minus Costs of Goods sold)
- These questions deal with the fundamental question of your business: can you sell enough of a product/service at a price that will create a profit?
- Does the cost of each product include all the expenses it should?
- How do I save expenses and become more efficient?
- Product x is very labor intensive.
- Product y is very machine (machine cost, depreciation, electricity, etc.) intensive.
- Concerned with allocating as much expenses possible into cost of goods sold
- Called Job Costing
- What should I make the most of?
- Should I raise or lower the price of one or more products?
- Should I get rid of a product?
- Should I add a product?
- Profit Maximization, Product Mix
- This is often an issue of limited resources and their most efficient use. Many issues like cash flow, space or equipment may limit your ability to produce everything you could sell. Profit maximization is the adjusting of the product mix to make and sell the highest profit-margin products.
- This also often involves increasing the price of the smallest profit-margin items to 1) increase their margin and 2) reduce the demand for them to the amount you are able to produce
All of the above information creates a framework to produce “What if scenarios” that can be used to analyze important business decisions.
- Business growth
- Should I purchase the equipment/new plant?
- Should I finance expansion through debt or new investors?
- Should I add more staff?
- Business contraction
- Can I make more profit if I outsourced?
- Would downsizing be more profitable?
All this information can be used to make better initial decisions, but it should also be used to monitor prior decisions. Did I make the correct decision? Was my initial information accurate? Can it be better?
All this information can also help you at the end of your business. What is my business worth? The details can provide important comparable information about the return that can be expected if someone would buy your business.
