Many small business owners focus on generating more revenue every year, and that’s a wonderful goal.  But not all revenue is created equally since some items are more profitable than others. If you sell more than one product or service in your business, then you may benefit from looking at your revenue mix.

While it’s fun to watch revenues grow, your business profit is what really matters. If your expenses grow faster than your profits, then you have a lot of activity going on, but you don’t get to keep as much of what you make.

An insightful exercise to try is to take a look at your revenue mix. Then you can ask “what if?” to optimize your profits.

Your Revenue Mix

Let’s say you offer three different services: Services J, K, and L. Your revenue pie looks like this:

J:  $700K or 70% of the total
K:  $150K or 15% of the total
L:  $150K or 15% of the total
Total:  $1.0 million

In this example, Service J is clearly the service making you the most revenue in your business. But is it making you the most profits?

The profit you receive from each of these service lines is as follows:

J:  $80K
K: $10K loss
L:  $30K
Total:  $100K

While Service J is generating the most profit volume for your business, it’s actually Service L that’s the most profitable.  Earning $80K on $700K yields an 11.4% return on Service J, but earning $30K on $150K yields nearly double the return at 20%.  Service L generates the most return. And if possible, Service K may need to be discontinued or turned around.

Optimizing Profits

Your strategy for a more optimum revenue mix might be to sell as much of Service L as possible while eliminating or fixing the problem around Service K.

It’s fun to experiment with different revenue mixes. And of course, there are many more variables besides profit, such as:

• What services/products do you prefer to work on/sell?
• Are you able to sell more of the most profitable service or are there marketing limitations?
• Is one service a loss leader for the others?
• Are you able to adjust the price on the lower margin services to increase your profits?

There are many more questions to ask and strategies to consider to make you more money, which is why we love being accountants.

A New Mix

We hope you’ll spend some time analyzing your revenue mix and having fun asking yourself “what if?” If we can help you expedite the process or add our perspective, please reach out anytime.

A great way to start 2021 is to take a fresh look at your business finances. Many things changed in 2020, and if you are in the habit of spending on the same items year after year, it’s the perfect time to decide what is essential and what can go.

There are only a few ways to increase profits when you think about it in black and white terms. You can either raise revenues or cut costs. Let’s take a look at where we can potentially cut costs.

Publications

These expenses tend to be monthly or yearly, and we tend to just let them automatically renew time after time. But do we really need them? Take a look in your Dues and Subscriptions account to evaluate what you really need to stay informed, and cancel the rest.

Memberships

If you are a member of an organization or two, what benefits are you getting from your investment? Does it raise revenue for you? Do you use everything the membership offers? If not, it might need to go on the chopping block.

Memberships are especially tricky if the organization provides a local meeting component as a benefit and your state or county has been shut down. There’s a tradeoff right now between supporting the organization so that it’s still there when we can freely meet again and being responsible about your own business costs.

Office/Store Rent

With many employees working from home, the question has come up in many businesses about how much space they really need. As leases expire, consider how much space you really need. Some employees may love to work from home permanently, which frees up space.

Retail stores that have moved their business online may be able to cut back on customer-facing space but might need more inventory storage space. A restaurant that has successfully transitioned to pickup and delivery orders might be able to get by with a smaller seating area.

Software Apps

Are you paying for any technology applications that you are simply not using?  This is a good place to look for cuts.

Some applications charge by number of contacts.  Keeping your lists clean inside these apps will avoid increases and cut costs in some cases.

Office Supplies

Do you really still need things like staplers and scissors on everyone’s desk? If your business is going paperless, you can save a lot on office supplies.

Printing

Do you need to spend money on printing, or can the printed item be delivered electronically?

Shipping/Postage

While information can be delivered electronically, physical goods still need to be shipped.  Make sure you have the best deal with your shipping vendors based on your volume.  You may also need to consider building your shipping costs into the price of the product or add a shipping fee to the bill if you don’t already.

Marketing

A great way to increase profits is to become more intentional about your marketing costs. Are you able to measure what’s working and what isn’t? Or are you doing the same thing year after year?

Marketing has changed so much, even in the last few years. It might be time to implement digital marketing methods, which can be more cost-effective than older, outdated methods.

Labor

Make sure employees manage their time effectively by providing the right training and supervision. This should help to reduce labor expenses.

Telephone/Internet

Has your business changed?  Do you need all those extra features you are paying for?  Could you do without those extra lines?  Would another phone plan save you money on long distance or international calls? Many telecommunication companies will often bargain with you or offer you a new deal just for checking in with them.

This gives you ten places to look to cut costs and correspondingly increase profits for 2021. If you need help reviewing your income statement, please reach out.

One of the biggest tax issues of 2020 has been clarified with the signing of the Consolidated Appropriations Act, 2021, (CAA 2021), and that was whether expenses that are normally deductible and that were paid with the proceeds of a Paycheck Protection Program (PPP) loan that is forgiven are truly deductible.

The CARES Act, which became law on March 27, 2020, was drafted so quickly that the question of deductibility was left out, but several members of Congress made it clear that deductibility was the intent all along. The IRS went the other way, publishing a notice (2020-32), a revenue ruling (2020-27), and a revenue procedure (2020-51), that took the opposite stance: PPP-related expenses that were forgiven were not deductible, therefore potentially causing business’s taxes to become much higher.

Congress has now reversed the IRS’s position with CAA 2021 in Section 276 (PPP) and 278 (EIDL). Gross income does not include forgiveness of PPP loans and emergency EIDL grants. Deductions are allowed for normally deductible expenses paid with PPP loan proceeds that were forgiven. It also provides deductibility for Second Draw PPP loans. This is all good news for taxpayers with PPP loans.

However, there could be timing issues that could reduce the deductibility of the full amount of the PPP expenses. There could also be amounts “at risk,” which is a tax term that limits your deductions in certain cases.

All of these issues need to be carefully considered on a case-by-case basis. Your tax professional is your best source to help you review all of these factors so that both your PPP loan forgiveness and allowable deductions are timed to reduce your tax bill.