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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