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:
2. Pricing Structure
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.