Category: Business Performance

But…. Where’s my Profit gone?!!?

Profit is what being in business is all about.  It’s what we all work so hard to improve and to grow.  Congratulating clients on the great profit they’ve made so far this year is a highly enjoyable part of what I do.

Invariably though, the next question is: “So, where is it?”

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Most business owners understand what the Profit & Loss Statement is and what it shows (albeit to different degrees).  Essentially, the profit figure on your P&L is the end result of revenue less expenses.  It shows how much revenue has come in, what expenses are required to run the business and how sufficiently revenue has covered the expenses.

On the other hand, not so many business owners know what the Balance Sheet is all about nor the essential information that it can tell you.  The Balance Sheet holds a lot of answers about the health of the business and it also shows where the profit has disappeared to.

2 of the usual suspects…

Profit often gets “caught” in a business in a number of ways (good & bad).  Here’s the common 2 culprits of tying up profit in a business:

Debtors: The business may be making great sales, revenue is growing and things look good on the P&L. If the Debtor balance grows relative to the growth of sales, than in most cases the cashflow of the business will track along fine.  However, perhaps insufficient Debtor Management practices are in place and customers are taking too long to pay forcing the Debtors balance to increase significantly in proportion to sales growth.  Slow paying customers and poor Debtor management unnecessarily ties up cash. It’s imperative for good business that invoicing is done both correctly and timely and that a system is in place to routinely follow up customer payments.

Stock: Businesses with stock need to have sufficient practices in place to ensure cash/profit isn’t excessively tied up in stock on hand.  If your stock purchaser is buying overs, or buying the wrong type of stock that isn’t selling or stock that isn’t required, then you are unnecessarily tying up cash in stock that could be used for something else.

If you would like to better understand your Balance Sheet and where your profit may be hidden, please get in touch today.

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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!!!

Is the Sky Falling in?

With over 15 years experience working with small and medium business owners I’ve had a lot of experience with reviewing new software programs, implementing new accounting systems as well as making sure business owners are using their accounting system in the best way possible for their advantage.

MYOB made a huge impact and has dominated in this area, boosted along by the introduction of the GST and the need to keep more updated records for regular BAS preparation.  MYOB in my opinion, up until the last year or so, suited the needs of the majority of small businesses (even a lot of medium sized businesses) and was more often than not, my first choice.

Harnessing advancements in technology, Xero has entered the accounting software market and is (quickly) changing all that. I’ve been reading with interest the opinions of “those in the know” regarding Xero and cloud computing and the changes to bookkeeping and the accounting industry in general.  To keep up with the latest in what’s happening, I recently attended the roadshows for both Xero accounting software and MYOB, which I found quite interesting (more below).

The contrast between the attendees at the Xero roadshow and those at the MYOB roadshow were clear and paint quite a picture.  There was a lot more colour, a buzz about the place generally and you could go as far to say people were “excited” about the Xero product.  On the other hand, the MYOB roadshow attendees generally were the image that springs to mind when you think “accountant”, enough said.  Generally, most attendees would have walked away satisfied that MYOB is (very) busily working away at updating their product to be more “innovative” and to work more efficiently in the cloud environment.

To be honest, I have a foot in both the Xero and MYOB camps. However, I must say that some of the talk about Xero and the cloud in general, reminds me of the Chicken Little fairytale. Is the sky really going to fall in with these changes?… In my mind these changes are advancements that provide the ability to add increased value to my clients’ business.

The way I see it, the old 80/20 rule springs to my mind. SME’s can cost effectively gain access to improved accounting IT functionality and accountants can harness it to provide real value to clients. Let’s systemise and make totally efficient the routine 80% of the basic accounts/bookkeeping function that is essentially repetitive. Why waste time on that?

What we’re left with then is the 20% that requires greater attention and provides the biggest opportunities to improve the business’ performance. This leads to having reliable reports that: are updated in real-time; are remotely accessible 24/7; and are produced in the most cost-efficient manner. This leaves time and budgets available to be able to implement solutions that will truly make the business better and ultimately, a mindset change. Sounds good to me 🙂

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.