Photo (CC) by 401(K) 2012, on Flickr

You probably have heard the phrase, “follow the money.” The phrase became popular the book and movie, “All the President’s Men,” by Bob Woodward and Carl Bernstein. These Washington Post reporters uncovered the details of the Watergate scandal, which led to the resignation of President Richard Nixon.

Today, this phrase remains valid for small-business owners who, when looking to succeed, need to “follow the money.”

Most business owners take this task seriously and record income and expenses so they can determine profitability. They look at what part of the operation generates the greatest revenue and, likewise, where they spend the most money. They often make changes, across quarters and years, to ensure growth remains steady and that no one area is bouncing up or down.

But to get the most out of following the money, digging deeper is necessary.

Starting on the income side, you need to look at where your business generates the most money and who are the clients buying your products and services.

Once you have identified who is buying, you need to search for why they buy. From these two pieces of information, you perhaps can sell more to your existing markets as well as find new customers through marketing additional benefits that may appeal to others.

This research also may give you the information you need to move into new markets. And it may identify where your clients are hearing your messages about your business and its products and services.

On the expense side, your task is to dig deeper into the categories to see where you may have leaks, or money that is dripping away. However, that task can be very time-consuming, so the savvy small-business owner must balance his or her time against the potential savings.

When evaluating your expenses, you need to consider new ways of doing things. Might you benefit from implementing technological changes? Balance such changes against maintaining customer and employee goodwill.

Finally, when looking at expenses, be sure to consider how a line item expense relates or correlates to the income side of the equation. An obvious example here is marketing. It may seem like an overhead item that can be trimmed. But what might be the ramifications of reducing your marketing efforts?

Perhaps spending more money on certain marketing tools will increase revenue substantially. The same might be said for salaries, the cost of your location, technology, etc. You don’t know what the best steps to take are unless you “follow the money.”

You can’t deny that “follow the money” is a great line for books and movies. Yet it also is very powerful when building a successful business.

Photo (CC) by Sarah, on Flickr

Question 1: What product or service in your business adds the most to your bottom line?

I hope you answered that question without even needing to take a look at your financials.

This may not be the product or service that necessarily provides the greatest return per item. You may sell only one a year. That’s great, but what is it doing for the bottom line of the business? And you shouldn’t be looking at where you get the greatest revenue because that fails to take into account the costs to make it available to the consumer.

You need to know what one item, or maybe it’s a category of items, is keeping the lights on and paying your salary?

Question 2: What are you doing to grow that item for your business? Or, in some cases, what are you doing to replace that item as it reaches the end of its life cycle or the competition gets tougher?

If this is your significant profit center, then you should be taking steps to do even more. How might you sell more? What marketing efforts might help? Do you know who the current buyers are and how they are using it and why they like it?

Related to selling more, do you have ways you can cut costs? What about product line extensions? If your consumers like this item, do you have other markets you haven’t tapped yet, or can you change the item slightly to attract another audience?

You also need to consider, before making a lot of changes for that item, where this product or service is in terms of its life cycle. No one item can maintain its place in the market forever. Think of paper. What is used to make paper has changed, the shapes and other aspects have changed, and more and more of the items we capture are stored electronically today.

And even if you find a new market, new competitors always are coming along who want to tap into that market. For example, Whole Foods has had much of the natural or organic market for itself. Well, the competition has noticed the trend and chains are moving in, including brands such as Costco.

Perhaps your best-performing item has seen its best years. So then you need to ask:

Question 3: What item do I have that might take its place? This might be the second-most profitable item or it may be something that is just taking off?

A related question might be: What item could I add to my inventory or set of services that (a) is trending higher (b) fits my business model and current or future customer base and (c) can help me be competitive?

The bottom line (in more ways than one): Knowing which items you offer that keep the doors open is crucial. Just as important, or even more important, though, is what you are doing to enhance the value of those items or looking for what will replace them.