Mark’s musing – How does Your Business Profit Measure Up

How does Your Business Profit Measure Up?  Are you happy with the Profit you are currently making in your business?  If not, what can you do about it?

You first need to understand what Profit is and how it is derived.  What is Profit?

The formula for Profit is: Sales – Expenses = Profit

Profit is what’s left over, after you’ve paid all your expenses

How to Increase Profit

Profit is something you can’t directly get more of, because it is what is left over. But you certainly can influence the bottom line by working on, and improving the following drivers that determine the profitability of your business:

Costs – There are 2 sorts of costs

  • Variable Costs – these are costs you incur directly in producing or buying the products and services you sell
  • Fixed Costs – these are costs you incur whether or not you make any sales

Units Sold – the quantity of products or services you sell

Price – what you charge for the products and/or services you sell

Your Profit Improvement Plan
To increase your Profit, you need to ask yourself 3 simple questions:

  1. What is my Profit now? – Refer to the last set of financial accounts prepared by your accountant
  2. What do I want it to be? – Rather than settling for what is left over after all of your expenses have been paid, set a goal for what you want your profit to be
  3. How am I going to get there? – What strategies will you use to increase your profit?

Although the normal formula for Profit is: Sales – Expenses = Profit, from a planning perspective, I think a better way to look at the formula is to start with the Profit you want and then work backwards from there:

Profit + Expenses = Sales

You may have heard the saying “He or she who aims at nothing, normally hits it with alarming accuracy”.

If Fixed and Variable Costs remain fairly constant from year to year, then to achieve your Profit goal, you now have a Sales target to aim at.

Example for a Service based industry

Profit target ($100,000) + Expenses ($20,000) = Sales ($120,000)

To achieve sales of $120,000 you need to;

  • Get more customers to
  • Stay with you and come back more often and
  • Spend more with you each time and/or
  • Recommend you to their friends and associates

How are you doing compared to other businesses in your industry?
Each year the Waikato University Management Research Centre in Hamilton collects data from New Zealand accounting firms in public practice.
They collate the data and then prepare comprehensive reports for numerous industries.

Ratios – The Basis for Comparison
Most of the data supplied in the survey questionnaire is converted into ratios.

In each report, there are 35 different calculations to compare your business to those in your industry.  A ratio expresses in one number the result of a comparison between two figures.  This approach enables businesses with varying turnover to compare their relative performance.

Average of the Best 3
The averages of the best 3 are those businesses that achieved the highest result for Net Profit per Working Owner. These results help identify ‘on average’ how the high performing businesses achieved their higher returns.

If you want to improve your Profitability, Mark Pfeifer will be talking more on this topic at our upcoming seminar

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Business Systems – Why, What, How?

What systems do I need and how do I get the most out of them.
What systems do I need and how do I get the most out of them.

At last count in our accounting firm we had 16 different systems that we use on a daily basis that all cover off a different part of our business functions.  The amount of systems that businesses run has changed significantly over the last few years as it has become a lot less expensive to develop and deliver systems, cloud computing has made it a lot easier to access sophisticated systems, and mobile computing has changed the way people want to use their systems.

So, as a business owner, how do you choose what systems you should use and how you should use them?

  1. Why implement a system into your business?

For me this starts with a good understanding of the strategy of your business and understanding what are the key drivers for creating the results in your business.  We can use a lot of systems because a particular team member likes them or they are fun to use but in a business you really want systems that make it easier to deliver the outcomes you want.

In this sense I think that systems that help you to effectively manage:

  • Sales activities
  • Customer relationships
  • Team and individual productivity
  • Performance and development of team members, and
  • Business improvements

should be high on the priority list of a lot of businesses.  It is also important when choosing which systems to implement that you get the team on board and can clearly demonstrate the business need for the systems you are implementing.

  1. What systems should I choose

When selecting any system you want to think carefully about whether you want your systems to talk to one another.  If you do want this, then you might want to look at your most important system first and choose the system that is a best fit for you in that area and then look at systems that integrate with that core system.

For example if you have various systems that utilise client data, ideally you want those systems to integrate so that if you update a customer’s details then these changes get reflected in all your systems.  If this integration is not built in to the core product and they are cloud based solutions then you can use a tool like Zapier to provide that integration for you.

I also find that when choosing a system you want to do your homework and, if you can do, find someone who is already using the system you are considering and get their feedback about it.

With most systems these days the small part of the cost is the system cost itself, the bigger costs is in the time involved in implementing it properly.  So in this sense you want to make a good choice.

  1. How to implement systems

Once you have chosen a system to use then I recommend appointing a system champion and get them to drive the implementation.  I see a lot of businesses doing minimal or no training on their systems but I think most training is well worth the investment.  The majority of systems we use collect data of some form or another, and when this is the case it is really important to report on that data and examine it critically.  This will then tell you whether data is being entered correctly and when it is the results you get from that system will be more meaningful.  I also recommend that whatever system is being used there should be a regular meeting where the results of that system are reviewed and discussed.

A great tool for helping to manage system implementations is Basecamp.  This is a high level project management and collaboration tool which is very flexible.


There is a lot to consider when deciding what systems you need, which system to choose and how to implement it, but in this day and age getting this right is critical to your ongoing success.

Paul Dawson will be speaking more on this topic at our upcoming seminar in Christchurch.  Click here to register

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