Let's start with a question: How did you come up with your business’s current strategy? What strategy did you use to come up with the best…..strategy?

So many owners are shooting in the dark or throwing ideas at the wall to see what sticks to help them generate more money. But the best strategy is the one that will produce winning results every time. This approach focuses on doing more of what works and reducing or stopping what doesn’t.

Knowing where to double down and where to focus your energy is not some mystery. The coolest part is that everything you need to know already exists within your business. You just have to know (and understand) where to look.

You’re probably focusing on the wrong part of your business

Most owners tend to focus their energy on the area of their business that produces the most revenue (sales). The reason? It’s really easy to measure and it’s right there in your P&L (Profit & Loss Statement.) But overall revenue/sales only tell a piece of the overall story of your business.

This is NOT where we recommend focusing. We want to look at and pay very close attention to the areas that produce the most profit, not sales.

The point of this article is to give you tools to set the right business strategy

In this article, we’ll show you how to find the areas that produce the most profit. It’s not easy, but in doing so you will learn a few things. You’ll be able to see what you should be doing more of and what activities you should stop doing.

When you finish, you'll have a very clear picture of how to move your business forward. You will have access to the data that will ultimately dictate the course for your strategic plan ahead. You will no longer be guessing what works. You’ll have a clear understanding and know with certainty where to put your time and energy.

Profit is the average of all your revenue streams

Revenue streams are your sources of revenue - the areas of the business that bring in money. There are so many types of revenue streams. This could be different channels for your products and services – (website vs. retail vs. Amazon), different product lines (service revenue / product revenue/ maintenance revenue), different types of customers (b2b, b2c), etc.

Some revenue streams contribute a lot to your profit while some revenue streams contribute a little bit to your profit. Some revenue streams even cause you to lose money. What you end up with is the average of all these multiple revenue streams.

Our goal is to understand and find out where the majority of your profit (not sales!) is coming from. You achieve this by truly understanding the profitability of each of your revenue streams.

How do I truly understand my revenue streams?

It’s important to understand that revenue streams differ in value. One stream may be bringing in the majority of your overall sales, but that does not mean it’s your primary profit source. Other streams, though they may bring in fewer sales, can actually end up contributing more to your overall profit. Just because something generates revenue doesn't mean it works most effectively.

To build your strategy, you need to be able to answer these important strategic questions:

• Which revenue stream has the highest margin?
• Where is most of the profit coming from?
• Which one has the most potential for profit?
• Which is the least profitable stream?

Looking at your bLooking at total revenue and total expenses as aggregates can be misleading. Your P&L does a great job of zooming out and showing you the large numbers and averages of everything combined. But, in order to know which streams are making and losing money, you need the profit breakdown of each individual stream.

How do I find the true profit of each revenue stream?

There’s one thing to do to get to the root of your profit source. Every single revenue stream needs its own “mini-P&L” – that tells you the profit for that specific stream.

Profit is revenue minus costs. Revenue is super easy to find— but figuring out your costs can be trickier. This is because you need to associate them with each specific stream. Profit is what remains after you pay all costs.

Step 1: Identify the costs associated with each revenue stream

Each revenue stream has its own gross profit margin, and understanding each type of profit helps inform strategy. Business owners often make the fatal mistake of only including COGS (cost of goods sold/direct costs) as their “costs”. They need to be including overhead in their calculations too. You have to add the overhead from each stream for the calculation to be accurate.

Step 2: Look at the individual results of each stream

Once you’ve seen the results, you can then begin to answer the strategic questions we’ve outlined above. Now you can figure out where you want to double down your efforts and which streams you may want to improve or stop altogether.

Let’s use an example of a business that sells products:

Let’s say you have a business and sell products through different channels to generate revenue. You have three key revenue streams: your brick-and-mortar storefront, your website, and selling to wholesalers who carry your products in their stores. These are the annual sales:

On the surface, it would seem your store is your winning revenue stream. The online store and wholesalers pale in comparison. From the outside, it would seem the store is where you should keep doubling down and focusing all your energy.

However, there’s a lot more to the story. Each of these streams has important overhead costs that are outside COGS. You must add and include all of them in each stream.

The storefront (there of course are more examples but these are the main ones):

• store manager and sales staff
• rent and utilities
• cleaning staff
• POS system

Now, let’s say your D2C online business costs are way less but still have overhead:

• only 2 people are required to box and ship orders
• lower utility costs
• warehouse rent in cheaper location
• E-commerce platform (like Shopify)

The last revenue stream is selling to wholesalers:

• sales team salaries and commissions to build relationships with wholesalers
• trade shows & events, plus all travel to promote the product to wholesalers
• outreach and marketing to get new wholesalers to sell your products

The overall profit, after considering each individual stream’s costs, tells a different story:

Just looking at the overall profit of $225k tells us absolutely nothing. But, looking at the individual streams that make up the $225k, is extremely helpful. It can help show us spots to remove our efforts or double down.

When you initially saw $1M, $200k, & $100k, you could easily make assumptions about each of these revenue streams. An initial snapshot would lead one to believe the brick-and-mortar store is the clear winner. But, when you look further, you see that the most profitable stream, the online store, actually has the largest profit margin at 50%. That cool $1M suddenly doesn’t seem so cool.

Reality Check: Profit margins tell a wider story

To generate $100k more in profit, we’d only need to generate $200k more dollars from the online store. Compared to the brick-and-mortar store, where we’d need to generate $1M more in sales to achieve the same result. From this example, it would seem the online store is the path of least resistance. This then becomes your starting point when you begin to think about what your strategy should become.

How can I turn all of my data into strategy?

Once small businesses complete an operating profit breakdown for each revenue stream. You’ll finally have answers to these important questions we referred to earlier:

Which revenue stream has the highest margin?  (in %)

→ The D2C online store

Where is most of the profit coming from? (in $)

→ It’s evenly split between the storefront and the online store.

Which one has the most potential for profit?

→ The online store, by far, has the most potential

Which is the least profitable stream? Perhaps is costing you money?

→ The storefront has the lowest profit margins, while the wholesale business has the lowest dollar amount.

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Once these answers become clear, you can then begin to make smart decisions about the direction of your business. You now know where to focus your energy, your time, and your resources. As a business owner, you need to decide your business strategy and what to focus on. You can begin to double down on your most profitable activities and prioritize them over the others.

Armed with data, you can now take different paths and make better, informed decisions

• Instead of opening another storefront location, you can focus on generating more traffic and sales for the website
• You can also choose to focus on building up your wholesale business (the stream with the second highest profit margin)
• Find a way to make the store more profitable/efficient, thus increasing its margins

There are many different directions you can go. The overall profit number, in this case $225k, doesn’t have a map telling you what your next moves should be. But, that’s the power of breaking down your revenue streams.

The “mini P&Ls” will arm you with the correct metrics to know where you should go. How you choose to get there and which activities you do is up to you. But knowing the most profitable source helps to get you going in the right direction.

The Clarity Calculator: Does the heavy lifting for you

Creating the “mini P&Ls” is not an easy task. Many owners have questions about organizing their P&L's and how to decide what should go where. In the example above, Marketing spreads its expenses across three different streams.

While this is one way to do it, it won't be entirely accurate. The concept is simple but not easy. You may face difficulties when you share an expense across different streams. Things like marketing costs, the owner’s salary, or back-office admin.

The easiest and most efficient way to combat this is by using our Free Financial Clarity Calculator. Otherwise, you will have to go through each expense and decide how much of the expense belongs to which specific stream.

The process can take time, but it is worth the due diligence. In the example above, we oversimplified this process. To get the true numbers, you have to be much more granular. Use your best judgment to decipher what belongs where.

Our free Financial Clarity Calculator can answer this question and various others just like it.

Financial Clarity Calculator is the best tool you can use to easily break down your revenue streams.

Uncover your true profit & margins

The Financial Clarity Calculator is a spreadsheet designed to guide you step-by-step through your business numbers. All so you can fill out your Financial Clarity Canvas with confidence—and make better decisions that drive profit.

We dedicate one of the sections of the calculator to revenue streams. Breaking down your overall revenue into individual streams to reveal their true contribution to your bottom line. We pull all the data for you and attribute each cost to each stream for you so that you can focus your time on discussing the answers to our strategic questions instead of dealing with spreadsheets and plugging in numbers on your own. Ours make doing the work a whole lot easier.

You will never have to guess where to focus your time again—the calculator gives you all the answers you need. With the Financial Clarity Calculator, you could simulate your different options in real-time. This lets you easily see the effect on your profit and bottom line.

Why did we create the Financial Clarity Calculator?

After working with and helping so many businesses, the process of breaking down revenue streams became tedious and painstaking. We created the calculator to get the answers and data we needed. We wanted them as quickly and as efficiently as possible to help them set their strategy. You can then get on to more important tasks like developing your strategy and knowing where to focus your time as soon as possible.

Need help? Don't want to tackle understanding your best revenue streams on your own? We've got you covered.

You don't have to go it alone. We can help you every step of the way. We have lots of resources and tools available to give you all the clarity you'll need.

• We have a 2-week hands-on Financial Clarity Sprint where we guide you through the entire process of understanding your numbers inside and out
• Book a FREE Clarity Call anytime: our profit experts are here to help you with clarity surrounding every aspect of your business. They'll help you get started and see which tools make the most sense for your business

Key Takeaways:

1. Your profit is the average of all your revenue streams and activities
2. You need to know the “mini P&L” of each stream in order to understand your business's overall true profit
3. Once you know this info, you can make strategic decisions. Know you know where to put your time, money, & effort when developing your business strategy
4. Not all revenue streams are created equal
5. Revenue is vanity. Profit is the only number that matters. Where that profit comes from matters even more.

Want to explore your streams and see which are making and costing you money?

Click here to access Financial Clarity Calculator

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