Few businesses rarely analyse the net profitability they derive from each of the different products or services they sell. The exercise can be very revealing.

When I have done this exercise with my clients they have frequently been amazed and yes sometime horrified where the profits are coming from or in some case not coming from. Inevitability within their stable of products and services there are some that are much more profitable than others.

This revelation usually results in some instant changes to adjust the imbalance and impacts their future marketing strategies and focus for their business going forward.

Most of us know the net profit we make in our business each year but how can we calculate the net profit we derive from each of the different products or services we provide.

Well in order to do this we need to fairly proportion the overhead and admin costs to each product or service. There are perhaps a couple of different ways you could do this however my preferred approach is to calculate your total overheads for the year minus all salaries and then calculating this as an hourly charge.

Next we need to determine a fair way to proportion the Admin salaries (including sales staff). To do this we make the assumption that each product or service we produce will require roughly an equal amount of admin and sales time. So the total admin salaries for the year divided by the total number of jobs will derive a fixed cost to be deducted from each product or service.

Below is a summary of the steps you can use to come up with an estimation of the profits you make from each of your products or services.

1. Calculate The Gross Profit - From your sales price (excluding GST) subtract the Cost Of Goods and a charge for the time taken to produce or deliver the service. This will require an estimate of the number of hours it takes to produce or deliver the service and an average hourly production labour rate.

2. Deduct from your Gross Profit figure calculated previously the fixed overhead figure. As explained earlier calculate your total overheads for the year minus all salaries and then calculate this as an hourly charge per person involved in a production / operations capacity. Multiply this figure by the number of hours required to produce the product or service.

3. We now need to calculate a charge for the admin and sales salaries. To do this calculate the total admin salaries for the year divided by the total number of jobs. This will derive a fixed cost to be deducted from each product or service.

There are alternative methods to coming up with this calculation and it may be necessary to use a slightly different approach depending upon the type of business. A good way to check if your approach is valid and fair is to see if when applied in reverse whether it equals your total profit for the year.

The result of this calculation can yield some surprising results. Business is a numbers game and knowing which products or services are generating the most profit are critical numbers for you to know. Knowing the numbers driving your business empowers you to make better decisions.