The profit curve of a firm is the total revenue (TR) curve less the total cost (TC) curve. these curves display the fluctuations of cost or revenue (Vertical Axis) at a given levels of output (increasing along Horizontal Axis).
Along the section of the curve where Total Cost is below Total Revenue, the point at which the 1st derivative of the Total Cost (TC) Curve is parallel (B) with the Total Revenue curve represents the level of output where Profit is maximized (A).
So now that you know this, what are the variables that you, the Business Owner, can address that impact “The Profit Curve”?
There are Six areas of your Business that you can address by defining Strategies, implementing Actions to increase Profits. Over the next few weeks, we will look in details to all six.
As your ultimate goal in your Business is to increase profits let’s look at the Six areas of your Business to address for profits are:
- Personal Profitability
- People Profitability
- Customer Profitability
- Sales / Marketing Profita
- Product / Service Profitability
- Market Profitability
Payroll represents one of the largest expense items for most businesses. As a business grows, it typically hires additional staff according to the most pressing need at the moment. Once a person has been hired, she or he can often become a permanent employee even when needs change. Many Business Owners are too busy creating products, services and generating revenue to pay close attention to employee performance. Over time, the result can be an inefficient and ineffective staff and a bloated payroll.
From an accounting perspective, payroll is an expense. We regard it as an investment and as such, it must yield at least an acceptable rate of return. Teh goal should be an optimal return. What is acceptable or optimal? And how can it be measured? This varies by industry and even by size of the business. A general rule of thumb is that each employee should contribute THREE to SIX times their salary in GROSS Revenues. Stated differently, revenues in your business should be THREE to SIX times your payroll. And don’t forget to include yourself in this calculation. Although you may not be drawing a salary, you still represent a cost to the business. If you were not there doing the work you are, how much would you have to pay someone else to perform your role?
As you continue to grow your business by driving sales, remember that the critical measure of success in any business is profits. Develop the habit of regularly examining the profitability of your People Profitability.