Finding real revenue opportunities means going beyond top-line sales. Here's our playbook for using your financials to find the parts of your business actually worth doubling down on.
Measure revenue for insight
The first step in using your financials to identify small business revenue opportunities is accurately measuring revenue and its related variable costs. This includes cost of sales and other variable expenses related to revenue. This number is referred to as your contribution margin. (For a deeper walkthrough, see our video on ecommerce contribution margin.)
Contribution margin = Sales price – Variable costs
You will want to focus your efforts on your most profitable revenue. Don't look just at contribution margins but also consider profit velocity. Profit velocity is your contribution margin multiplied by sales volume.
| Product | Sales Price | Contribution Margin | Sales Volume | Revenue | Profit Velocity |
|---|---|---|---|---|---|
| Widget A | $47.00 | $23.00 | 100 | $4700 | $2300 |
| Widget B | $63.00 | $12.00 | 100 | $6300 | $1200 |
Depending on your industry, you can compare contribution margins and profit velocity in the following ways:
- Product SKU
- Job type
- Service offering
- Location
- Product Line
- Industry focus
You can also express this as a percentage, called your contribution margin ratio, by dividing contribution margin by sale price. For Widget A, that's $23 ÷ $47, or about 49%. The ratio makes it easier to compare products with very different price points, even though profit velocity is what actually tells you which one is driving more total profit.
For example, if you are an ecommerce company, you'd compare contribution margins and profit velocity by product SKU. This will help you identify which products give your business the most profits. You can also segment your revenue by sales channel to give you further data.
Understanding your revenue
Once you are measuring and segmenting your revenue in multiple ways, you can do some analysis to make comparisons. Comparing contribution margins, breakeven points, and how revenue might affect other revenue is important. Diversifying is another important factor to consider. When analyzing and understanding your revenue, remember to consider all factors. What looks like revenue opportunities for your small business can be deceiving.
Making wise decisions
Finally, you'll need to make decisions on where to focus your small business revenue opportunities. Optimizing revenue for margins often results in short-term limited growth. Optimizing revenue for growth, often limits margins. There is a time to focus on growth and a time to focus on margin. Analyze and choose wisely. And remember that new revenue takes time to build.
If you're leaning toward protecting margin, especially during leaner periods, our guide on cost optimization strategies walks through how to do that without cutting the wrong things.
Putting it into practice
Remember that good measurements enable better decisions. Revenue insights are industry and business specific. So, measure and analyze in as many ways will be beneficial in making key business decisions for your business. And it's hard to optimize revenue for margin and growth. You may have to be strategic in whether you focus on margins or growth, depending on the stage of your business.
Frequently asked questions
What is contribution margin and why does it matter?
Contribution margin is your sale price minus variable costs (COGS and other variable expenses). It's the foundation for identifying which revenue is actually profitable, not just which revenue is largest.
What is profit velocity, and how is it different from margin?
Profit velocity is your contribution margin multiplied by sales volume. A product with a high margin but low volume can generate less total profit than a product with a lower margin but much higher volume, so looking at margin alone can be misleading.
How should I segment my revenue to find opportunities?
It depends on your business: by product SKU, sales channel, job type, service offering, location, product line, or industry focus. Ecommerce businesses typically get the most insight from segmenting by SKU and sales channel.
Should I focus on growth or margin?
It depends on your stage. Optimizing for margin often limits short-term growth, while optimizing for growth often limits margin. Be intentional about which one you're prioritizing at a given time, rather than trying to do both at once.
How long does it take for new revenue opportunities to pay off?
Longer than most owners expect. New revenue takes time to build, so give a new SKU, channel, or offering enough runway before judging whether it's actually a good opportunity.
Let's find your most profitable revenue
Contribution margin and profit velocity are only useful if your numbers are accurate enough to trust. LedgerGurus builds the reporting ecommerce businesses need to see profitability by SKU, channel, or product line, so you know exactly where to focus.
