Category: Benchmarking

Be all over your business like a rash!

Gross profit is a key indicator of your business’s overall health, so keep reading!

Measuring and monitoring your gross profit regularly will tell you a LOT about what’s happening in your business and how you can make more money.

So firstly, what is gross profit?

Gross Profit =

Sales Revenue

Cost of Goods Sold

It’s usually represented as a % of sales.

Generally, the higher the gross profit % the better.

Gross profit can be measured for your business overall and it can also be used on a more detailed level for eg. per product line, type of customer, location etc.

Why is gross profit so important?

Gross profit is the amount of money left over from sales to cover your overhead expenses (electricity, rent, insurance etc).  In most cases your overheads are relatively fixed and there’s not a lot that you can do about them.  Not the same for gross profit!

Measuring and monitoring gross profit and investigating significant fluctuations allows you to know exactly where, how and why changes need to be made so that you can make more money from each sale.

It’s imperative to understand what your most profitable and least profitable product/service lines are. You may use the information decide to stop offering unprofitable lines and/or decide to “push” your more profitable lines in your marketing for example.

What should you be looking for?

Gross profit should remain fairly stable over time.  If it fluctuates significantly downwards it’s an indicator to further investigate for things such as possible fraud, accounting irregularities, mismanagement or perhaps increased competition.  If any of these are the case, it’s obviously best to sort them out ASAP.

If your gross profit fluctuates in a positive way, it could indicate an improved product mix shift, better buying decisions or improved efficiencies.  It’s good to know these things so that you can keep doing them!

So it makes a lot of sense to keep your eyes firmly on your gross profit right?

Tips:

  1. Determine your overall business gross profit and monitor it regularly (eg monthly)
  2. Determine the gross profit of your individual product /service lines (and even by location, customer type, business divisions if possible) and monitor regularly.
  3. Make an effort not to discount or compete on price. Instead, look for ways to differentiate your offering on another basis eg. turnaround time, availability of support, ease to buy etc
  4. Review your supplier’s invoices regularly to ensure quantities and prices are correct and are reflected in your sales model (know in advance when supplier prices have been pushed up so that you can consider raising your sales price)
  5. Have strong systems in place for stock/materials. If stock goes missing for example or you have a lot of wastage it will affect your gross profit. If reporting is incorrect it will also impact your gross profit. If stock is obsolete or slow to move, then consider dumping it.
  6. Measure and monitor!!!
Advertisements

Is your business on an ATO radar? Use ATO benchmarking to find out …

What do you do to keep your finger on the pulse of your business?  A quick check of the bank balance perhaps?  A walk around the factory floor?  Every business owner has their own way(s) of determining how well their business is performing. Successful business owners have a firm grip on how their business is performing and how it should be performing.

As a business owner, it’s always good to get your hands on business benchmarking information for comparison purposes.  Finding good benchmark data is easier said than done though! Compiled from tax returns and Business Activity Statements, the ATO has some basic benchmark data available for small business, and it’s worth taking a look.

The ATO benchmarking data is handy for a couple of reasons.  As well as providing you with an idea of how your business performs against others in your industry and turnover range, it seems that you will also find out if your business is on an ATO radar.  According to the ATO, businesses operating outside their key benchmark range “may be contacted” by the ATO. Useful to know? – yes!

I recently found the ATO small business benchmarks  to be a useful guide for a client of mine (as below). I discovered that the business is performing and reporting inside the benchmark ratio zones.  So just based on this, the business would not fall on an ATO target list. Additionally, labour levels form part of our regular business monitoring, so it’s also interesting to note that my client’s labour levels are less than the industry average (21% v 27%).  And it’s always good to know that motor vehicle expenses are on the lower side of “normal”!

ATO Benchmark Ratio Name

ATO Industry Benchmark Ratio

Client Business Ratio

Rating
Labour/ Turnover

21% – 32%

21%

GOOD

Average Labour

27%

21%

GOOD

Total Exps/ Turnover

84% – 93%

87%

GOOD

Average Total Exps

89%

87%

GOOD

Non Capital Purchases (BAS)/ Total Sales

51% – 65%

65%

GOOD

Motor Vehicle Exps / Turnover

4%-25%

12%

GOOD

I recommend that you develop ways of having a strong, reliable “finger on the pulse” of your business.  Why not compare your business’ results against the ATO benchmark ratios and see how your business measures up?  I’m more than happy to quickly run the numbers for your business, just ask!  A small donation to my fundraising page as a token of appreciation would be greatly appreciated.