I wrote these thoughts in answer to some questions a friend asked, and she found them helpful enough, I thought I'd share some questions to ask yourself. They are questions I ask myself from time to time.
For a small flock to be profitable, you need to focus in on what 2-3 things are most successful - taking into account your interests, limitations and abilities. What I like about sheep is that they do produce multiple products, giving them the potential to be more profitable than other livestock.
Take a look at the breed(s) you have. What are their strengths? Weaknesses? How are you taking advantage of their strengths? If you are not using them to their advantage, why not? If you don't want to exploit their advantages, why do you have them?
Selling breeding stock can be successful, but you will need to spend time on advertizing, promotion, record keeping, culling and selecting to develop a reputation for good breeding stock.
OK - wool. You can market it yourself. It CAN be a profit center. However, you either need be willing and interested in spending the time to market individual fleeces, or rethink your marketing plan. A different way would be to produce a high quality wool to sell at wholesale price to someone else who will retail it. (think making a run of yarn, etc) But to do that, you need to be producing a fairly homogenous type of wool. You'll need several fleeces, and they need to be of consistant breed and type.
I think a MAJOR problem in the US sheep industry is that we try to do too many things. In the UK, they either focus on breeding purebreds, or producing mules, or buying mules and breeding them all to a terminal sire to sell all the lambs for meat. We try to do all the steps, and end up messing around with too few ewes and too many rams and too many breeding groups and not doing any of it well. :^)