Garrett was disconsolate. His LLC had another great year from the sales and revenue standpoint. His LLC’s revenue had grown yet again, as it had year over year since he began it five years earlier. Garrett had assumed that his LLC would soon turn a handsome profit on its own. But it had not, again this year. His profit was just enough to keep him going. Garrett resolved to find out what was going on. He didn’t want to work so hard for yet another year, only to find his LLC’s profits meager, despite growing sales and revenue.
Profit
Sales and revenue may seem like an LLC’s lifeblood. They are not. Profit vitalizes an LLC’s business. Profit is the excess of revenue over expenses. Profit means your LLC is making money. If your LLC is not making money, then it’s just spinning its wheels. And spinning wheels soon run out. Your LLC won’t be able to sustain operations and continue its growth without, at some point soon, turning the corner into profitability. Profit is the return that members receive for their contributions. Members who do not profit from their LLC’s operations should either fix the profit problem or move their contributions somewhere else where they can profit. That’s the nature of capital, to seek the highest available return. Profit is good for everyone because it directs capital to its best uses. Profit means flourishing. Loss means to do something different or do something else.
Formula
Given the definition of profit, as the excess of revenue over expenses, improving your LLC’s profit generally follows the straightforward formula of increasing revenue while reducing expenses. That formula can be a simple and effective guide. Look at your LLC’s financial statements, especially the cash-flow statement (P&L). Examine expense categories for areas where you might reduce those costs. Examine revenue categories for where you might increase those sales. Increasing profits doesn’t have to entail rocket science. When you identify an expense that might be more than your LLC’s operations require, walk around investigating. Ask personnel about whether the expense is necessary and how reducing the expense might affect operations. Contact the supplier asking how your LLC could reduce the supplier’s cost. Do the same on the revenue side, speaking with your LLC’s sales personnel and asking customers or clients what would entice them to use more of your LLC’s products or services. Follow the basic formula.
Analyses
Often, though, to improve your LLC’s profits, and to learn why it is not profiting, requires some form of analysis. To guide your LLC toward profitability, you may need to examine your LLC’s total operations, from marketing and advertising to personnel, systems, processes, production, delivery, and finances. Your profit problem could be anywhere. It could be with your LLC’s vision. It could be that you have identified the wrong customer or client demographic, or failed to discern the demographic’s preferences and needs. It could be that your LLC’s advertising isn’t reaching your LLC’s demographic. Or it could be that the goods or services your LLC offers aren’t the right quality or price. It may instead be that your LLC has done everything right in its customer or client population, products or services, and product or service delivery, but is failing to control expenses. The point is that if your LLC is not profiting, then you should be closely analyzing why not.
Benchmarking
Benchmarking can be a great aid to your analysis of your LLC’s profits. To benchmark means to compare your LLC’s performance to the typical, median, or average performance of other businesses in your LLC’s field. Investigate how other businesses in your LLC’s field operate and perform. Network among the managers and owners of other businesses in your LLC’s field, learning what you can from them about their operations. Government agencies, business associations, and associations in specific trades, professions, sectors, and fields gather, analyze, and publish statistics. Investigate that data until you have a clear sense of how other businesses in your LLC’s field perform.
Data
Then use that sector data to analyze how your LLC is performing. Compare and contrast whatever you find to be the median or mean in your LLC’s sector with how your own LLC operates and performs. Do so on every measure you discover, whether the business’s size, location, products, services, number of personnel, number or demographic of customers or clients, annual revenue, annual expenses, advertising budget, profit margin, or any other measure. You don’t know what you may learn until you learn it. You may discover that your LLC is way out of line on one measure or another. You may discern that misalignment to be good or bad. But examine and construe the data. See what you learn, and then see what you may want or need to adjust.
Margins
Profit margin is one benchmark you should investigate. Business fields have different profit margins, meaning the percentage of profit as a portion of total revenue. What would be a great profit margin in one sector would be an awful profit margin in another sector and vice versa. Grocery sales, for instance, have low margins. Retailers sell a lot of groceries to make a little money on the large revenue. Childcare and landscaping services are other low-margin sectors because of high labor costs. By contrast, many professional service businesses, like real estate, marketing, and event management, have high profit margins. Lower revenue still produces high margins. Find out the profit margin in your sector to determine whether your LLC’s margin is in the ballpark or not. Businesses of different sizes in the same field also have different profit margins. Scale matters. A small business with low margins may just need to scale up in sales to increase its margins. The opposite could also be true that high-volume sales are eating up the profit margin, perhaps by requiring inefficient use of resources like labor overtime. Analyze your LLC’s profit margin against sector benchmarks.
Trends
Trends can also teach you a lot about your LLC’s profit margin. Trends in your LLC’s business sector may show that everyone is struggling in the same way. Outside factors like economic cycles and changes in customer or client preferences may be affecting your LLC’s whole field. Your LLC may need to change sectors, change customer or client demographics, or modify products, services, or advertising. Trends in your own LLC can also teach you a lot about your LLC’s profit margin. Your LLC’s expenses may have crept up in certain categories. Your LLC’s sales may have moved swiftly up around one product or service but swiftly down around another product or service. Learn from the trends. Control expenses, and pursue profit over pursuing sales.
Ratios
Ratios can be a great tool for improving your LLC’s profits. Analyzing individual factors, like sales, billings, collections, total revenue, expense categories, and total expenses, can inform your judgment. But analyzing two factors together, relative to one another, can reveal important things that analysis of a single factor would not show. Profit margin is itself a ratio of net profit to total revenue. For another example, a ratio of high billings to low collections may show that your LLC is selling plenty of goods or services but to customers or clients who can’t afford them or won’t pay for them. For another example, a ratio of high operating expenses to low profit margin may show that overhead is eating up your LLC’s profits. Ratios of profit to equity (return on equity) and profit to assets (return on assets) can also reveal areas you need to address to improve your LLC’s profitability.
Performance
Individual performance measures for personnel, products, or services can also inform your judgment about why your LLC isn’t making enough money. You may love having a certain producer employee around, for their congeniality and overall positive spirit. But is that employee generating sales, revenue, and profit? The employee generating your LLC’s profit may be hidden away, underappreciated, and unrewarded. Adjusting your evaluations, compensation structure, and expected practices may improve your whole team’s performance. The same may be true of your LLC’s specific products or services. Some products or services may be highly profitable, while others sell at losses. Culling your LLC’s product or service lines may be all you need to do to increase profitability.
Control
It is not enough that you make adjustments in your LLC’s practices in a diligent effort to improve profits. You should also control for those adjustments, meaning to ensure that they stick and persist. Personnel and systems tend to return to norm. Whatever you and the other individuals involved in your LLC’s operations typically do, you’ll soon return to doing it, despite your effort to change and improve it. That’s why you need improvement controls. A control is a way of ensuring that your change continues in place until it becomes the norm. You might, for instance, eliminate a budget expense category and terminate the associated supplier contract to ensure that an unnecessary expense does not resume. Or you might require an employee to complete a brief report weekly or monthly on the practice you altered, until you can see that the practice has continued in place, while still producing the improvement. Whatever your means, institute a control so that your LLC really does improve its practices rather than simply go through the motions before returning to a desultory norm.
Donations
While profit is likely your primary financial interest in operating your LLC, an LLC can offer tax advantages to a member wishing to make charitable donations. Individual taxpayers generally get to deduct charitable contributions from their federal and state income tax obligations only when qualifying for itemizing deductions. With the standard deduction as high as it currently is, many fewer taxpayers are itemizing deductions. That means that many fewer taxpayers are getting the tax-reduction benefit of charitable contributions. But if your LLC makes a qualifying charitable contribution to a 501(c)(3) charitable organization, then the LLC gets to reduce its net income dollar for dollar against the contribution, without having to overcome a standard deduction amount. You, as the LLC member receiving the LLC’s pass-through income and paying tax on that income, can in effect receive the full benefit of the charitable contribution. Consult your tax preparer or attorney about the possibility of gaining this benefit.
Key Points
Your LLC should produce a reasonable return, meaning profit.
You may be able to substantially improve your LLC’s profitability.
Increasing revenue and reducing expenses may improve profits.
Analyze your LLC’s performance against sector benchmarks.
Examine your LLC’s profit margins and other trends and ratios.
Examine performance of personnel, products, and services.
Control improvements to ensure that they persist.