How much profit should your business be making?

How much profit should your business be making?

How much profit should you be making?

How much should you be paying yourself?

The Business Owner’s Guide To Finding Out – Introduction

How much profit should we be making, and how much should we be paying ourselves as business owners are two of the most internally pressing questions we tend to ask ourselves. In this post, we’re going to look at (and answer) both of those questions.

We rarely verbalise it, but we want to know the answers – as business owners and human beings there are a couple of traits that we carry with us…albeit subconsciously most of the time:

We’re curious: after all, you wanted to know what answers you would find in this blog post based on the title of the blog post

We’re competitive: we want to know how we are doing compared to our friends, acquaintances, business peers, our contemporaries and our competitors – in fact, just about business benchmark that we can find to compare our own performance to

We’re compassionate: we fundamentally know that our business (product or service based) has a need to serve its audience with a solution to their problem – essentially – we want to help (and make bank, of course 😉)

Idea to develop {We forget however, to be compassionate with ourselves – we don’t pay ourselves enough for the time and effort – mental and physical – that we put into our businesses. Often, we’re too worried about looking after everyone else, and we tend to put ourselves last}

So what does all this mean then when it comes to finding out whether or not we are in fact paying ourselves enough, or making enough profit? How do we know if we’re leading the pack?

We go back to measuring two of the most primal indicators: profit and pay – how do they compare?

Make sure that you access the worksheet here to make it nice and easy to work out your answer.

Question 1: How much profit should we be making?

As is so often the case with such questions, the answer is…it depends…

However, the good news is that there is an answer for you and your business – it just depends upon the ‘size’ of your business. All that we need to answer the question more accurately is a suitable benchmark that will allow us to compare the relative performance of businesses of different ‘sizes’.

The benchmark that we use when we apply the Profit First method within a business is ‘Real Revenue’.

So what is ‘Real Revenue’? It is a term that we use in the Profit First system to show that ‘top line revenue’ is not truly representative of the ‘size’ of a business.

Your ‘Real Revenue’ is the revenue your firm generates when Materials and third party Sub-Contractors are excluded. This number is used to represent the ‘true’ income of a company, and the cash flow it actually manages and controls – Real Revenue is the real money that your business makes, therefore.

Real Revenue gives us a quick way to get all companies onto a level playing field so that we can make sensible comparisons between them.

Real Revenue – The Calculation

Here’s how we work out Real Revenue:

Total Income

Less: Materials Costs

Less: Sub-Contractor Costs

= Real Revenue

 

Idea to develop {Is Real Revenue the same as Gross Profit?}

When it comes to materials and sub-contractors, whilst you may make a margin, it isn’t the core driver of profitability (because you don’t really control it).

If you run a service based company, then it is quite possible that your Total Revenue figure is the same (or very close to) your Real Revenue figure. Note: when applying the Profit First system in a business, if Materials plus Sub-Contractors come to less than 20% of the Total Revenue of the business, then we normally class these costs as ‘Operating Expenses’ as they don’t make up a significant proportion of the costs of the business overall.

Real Revenue – An Example

Let’s start with an example of a building contractor firm, and assume that they have a $3,000,000 top line revenue (Total Income). They spend $1,000,000 on materials and a further $500,000 on sub-contracted labour in order to complete the projects that they are working on.

Taking the calculation above, that means that they are in fact a $1,500,000 Real Revenue firm according to the Profit First method ($3,000,000 – $1,000,000 – $500,000 = $1,500,000).

All that is really happening here is that there is $1,500,000 being moved around for other people and businesses – the building firm is just a conduit for moving money from the customer directly to the purchase of materials and the cost of sub-contractors.

So, before we can make a sensible judgement about what the profit level for your business should be, we need to know what the ‘Real Revenue’ of your business is first…

Jot down the numbers for your business in the table below: (or access the worksheet here)

Total Revenue $ / £ / €
Materials Costs $ / £ / €
Sub-Contractor Costs $ / £ / €
REAL REVENUE = $ / £ / €

 

You should be able to find these numbers fairly easily from your own records (spreadsheets, or accounting/bookkeeping platform if you do your own bookkeeeping etc – if you are looking at your accounting system, you should find these numbers towards the top between the ‘Sales’ line and the ‘Gross Profit’ line), or you can ask your bookkeeper / accountant for them.

Remember, deduct only materials and sub-contractor costs from your ‘top line revenue’ number – if the materials and sub-contractor costs come to less than 20% of your top-line revenue (you may instinctively know this, ie you don’t use any ‘raw materials or third-party sub-contractors), then we’ll assume that your top line revenue is the same as your Real Revenue number (nice and easy!)

We’ll need your ‘Real Revenue’ number for later on…

You will also need your ‘Net Profit’ number later, so whilst you’re digging into your Profit & Loss Account, note this number down for later too (you should find this number right at the bottom of your Profit & Loss Account, or again, ask whoever does your bookkeeping / accounting for this number if you are unsure).

We need to know the ‘actual’ amount (number) for your Net Profit, and we need to calculate what that is as a percentage of your Real Revenue (Net Profit divided by Real Revenue).

 

Net Profit $ / £ / €
Real Revenue (number calculated above) $ / £ / €

Net Profit as a % of Real Revenue

(divide Net Profit by Real Revenue)

%

 

 

Question 2: How much should you be paying yourself?

As a business grows, how a business owner ‘earns’ their money tends to change. Typically, the aim is to work less ‘in’ the business, and more ‘on’ the business.

As a result, the way in which a business owner is financially rewarded will also change through an increase in profit payments (dividends / distributions), and a relative decrease in the wages component.

So we need to work out what your Total Owner’s Pay is…

Jot down the following numbers in the table below: (or enter into the worksheet if you have already downloaded that – if not, you can access it here).

Gross Salary $ / £ / €
Dividend / Distribution $ / £ / € +
Total Owner’s Pay $ / £ / € =

 Add your Gross Salary to the additional Dividends / Distributions you take to work out your ‘Total Owner’s Pay’

Now we need to work out what ‘Total Owner’s Pay’ is as a percentage of our ‘Real Revenue’ number (Total Owners Pay divided by Real Revenue)

Total Owner’s Pay as a % of Real Revenue

(divide Total Owner’s Pay by Real Revenue)

%

 So now we have 2 percentage figures noted down – one for our Net Profit, and one for our Owner’s Pay.

In order to complete the picture, there are 2 other components that Real Revenue must cater for:

Tax

Operating Expenses

They will make up the balance of the 100% allocation of Real Revenue in the tables below.

The tables below show the typical Real Revenue bandings – applied initially as Target Allocation Percentages according to the Real Revenue level of a business.

These percentages have been compiled over an extensive period of time, and are as a result of comprehensive research and analysis by Profit First, and have been found to be representative of companies that exhibit ‘healthy numbers’ at the various levels of Real Revenue range.

Let’s start with businesses that have a Real Revenue of below $1,000,000 (c£750-800,000):

Real Revenue Range $0 – $250k $250 – $500K $500k – $1M
Real Revenue % 100% 100% 100%
Profit 5% 10% 15%
Owner’s Pay 50% 35% 20%
Tax + Operating Expenses 45% 55% 65%

Example:

For instance, let’s take a business that has a Real Revenue of $300,000 (so we will use the percentages from the middle column from the table above):

Our Profit should be: $300,000 x 10% = $30,000

Our Owner’s Pay should be $300,000 x 35% = $105,000

 

Let’s move onto businesses that have a Real Revenue of more than $1,000,000 (c£750-800,000):

Real Revenue Range $1 – $5M $5 – $10M $10 – $50M
Real Revenue % 100% 100% 100%
Profit 10% 15% 17%
Owner’s Pay 10% 5% 3%
Tax + Operating Expenses 80% 80% 80%

 

Example:

For instance, let’s take a business that has a Real Revenue of $1,000,000 (so we will use the percentages from the left hand column above):

Our Profit should be: $1,000,000 x 10% = $100,000

Our Owner’s Pay should be $1,000,000 x 10% = $100,000

Bringing It All Together – Your Answers

Consequently, now that we have found out the answers to the questions above, we need to bring all that information together so that you can find out whether or not you business is making enough profit and whether or not you are paying yourself enough as the business owner relative to the Real Revenue size of your business.

Real Revenue Range (for your business) $/£/€
ACTUAL Real Revenue (for your business) $/£/€

 

ACTUAL Net Profit (for your business) $/£/€ %
ACTUAL Total Owner’s Pay (for your business) $/£/€ %

 

Now we need to enter the Profit % and Owner’s Pay % numbers from the table above into the second column in the table below,

AND

We need to add in the 2 percentage figures for Profit and Owner’s Pay from the Real Revenue Range Tables above (whichever range applies to your business) into the first column for the Target Real Revenue Range:

 

Target Real Revenue Range % Your Actual % + / – %
Real Revenue 100% 100%
Profit
Owner’s Pay

In conclusion:

How did your business measure up to the benchmark levels?

How far above (or below) the Target Real Revenue levels were you?

Let me know in the comments below!

This is normally the moment that people need to check in with their emotional state!

Feelings can range from elated, through ‘breathing sigh of relief’ to disappointed…

If you have beaten the benchmark figures and are feeling elated as a result of your answers – congratulations! – keep doing what you’re doing, but remember to keep a keen eye on those expenses though! Come and celebrate with me – schedule a call here to let me know!

If you are breathing a sigh of relief, then chances are you realise that your positive answer is more by luck than judgement – which is fine at this point (you are where you are, after all), but this is probably not going to sustain as the business grows further without a system in place that intentionally creates an environment for your business to generate the right levels of profit, and one that is capable of paying you your just reward as a business owner…so let’s build on the solid platform you have built – schedule a call with me here so that we can plan out how to sustain and improve upon your current position.

If you are feeling disappointed, then now is the time to take action and plot a new course when it comes to how money is managed and allocated within your business. As hard as it may seem at this point, we definitely need to talk about the situation in which you find yourself right now…take the action step that you need right now and book a call with me here and we can work out a plan to get you to where you want to be.

Hi there, I'm Jason!

As a Certified Profit First Professional Coach, I specialise in driving profit growth in ambitious entrepreneurial and owner managed businesses.

Profit is the commercial non-negotiable. I want to help you to create a more profitable business so that you have the freedom to make the choices that you want to make, to create the impact that you want your business to make - be that within the business, in terms of your own personal life satisfaction (and that of your management team & staff), and socially.

As a profit growth strategist and mentor, I help business owners get clarity over their finances - specifically as it affects their profitability. That means that we focus on getting intentional about improving business profitability with simple strategies.

Together we make sure that the business is baking profit into every sale, that business owners and stakeholders are able to receive a commensurate reward, that money is set aside for taxes (corporate and personal as appropriate) - and we create a buisness model that fits around those three priorities.

Learn more about the great work that we can do together here on the website

Or you can book a call here 

 25+ years of commercial experience are blended into a hybrid mix of business growth coach, consultant and CFO, bring strategic and tactical support to businesses looking to transform their profitability.

I graduated with an Accounting & Finance degree, have been the Bookkeeper, Financial Controller, Financial Director, CFO & Commercial Director, Financial Strategist, Consultant, Coach and Business Mentor. That has covered business turnarounds, corporate SME/SMB growth, and external roles including being a registered business finance growth coach on the UK Government's 'Growth Accelerator' scheme.

What does that all mean for you?

Knowhow. And absolute dedication to the transformation of the profitability of your buisness.

So, make the decision to invest in your profitability and book your call here.

How To Increase Profit In Your Business In 3 Easy Steps

How To Increase Profit In Your Business In 3 Easy Steps

HOW TO INCREASE PROFIT IN YOUR BUSINESS IN 3 EASY STEPS

A profitable business is what we all crave. As entrepreneurs and business owners, enough is never enough. How to increase profit in our businesses becomes a skill that we have to become adept at – fast!

What we do know is this :

We hustle hard to earn profit, when what we actually want is a neat and simple system to help us increase profitability in the most efficient way possible. So that is exactly what we’re going to demonstrate here – how you make your business more profitable by applying 1 simple, universal concept.

We’re going to see that there are only 3 things that will ever influence how to make a business more profitable, and we’re going to see why the system holds true for anyone looking to create a very profitable business.

[ctt template=”11″ link=”956XK” via=”yes” ]There are only 3 things that will ever influence how to make a business more profitable[/ctt]

You might be wondering at this stage:

  1. Will this work for my business?
  2. Will it be difficult to understand?

So let’s answer those two questions now:

This will work for any business, regardless of:

  • Geography – it doesn’t matter where in the world the business is located
  • Size – turnover, staff number or office size (office, ‘factory’ or home based)
  • Whether the business is product or service based

The actual concept around how to make a company profitable is as simple as it gets:

It is essentially based around 2 images that you need to remember (no numbers!)

We’re going to outline how building a profitable business needn’t be as tough as we had come to think. The 3 easy steps will provide you with a ‘skill for life’ that you can take into any business that you ever start or are involved in – it will show you how to create a profitable business, and diagnose where the profit is leaking.

So how can a business increase profit?

We need to start with a basic understanding of how to make profit in business:

At it’s simplest level, a business will make a profit if its revenue is greater than its expenses.

This is normally summarised in a ‘profit and loss account’. Whilst you may ordinarily be used to seeing a whole bunch of numbers on a page as presented to you by your accountant, it can actually be broken down into 8 words…well 7 actually as one of them is repeated – see it’s easier already 😉

Let’s take a look at it in image format (no numbers required here, it is the principle that we need to understand):

How to increase profit - the 8 word Profit & Loss Account

The 8 word Profit and Loss Account

Before going any further we need to make sure that we have a clear understanding of the words used in the image above:

  • Sales – Also often referred to as ‘turnover’ or ‘revenue’

This is the amount invoiced to clients for your goods or services

  • Direct Costs – Also often referred to as ‘Cost of Goods Sold’

These are the costs that relate specifically to a sale – this typically can include a ‘direct labour’ element as well as a cost attributed to materials, or production costs

  • Gross Profit – This is a calculation and is expressed as an amount

Sales – Direct Costs = Gross Profit

  • Gross Margin – This is a calculation and is expressed as a percentage

Gross Profit / Sales = Gross Margin {where ‘/’ means divided by}

The Gross Margin expresses the amount of Gross Profit earned as a percentage of Sales. {This allows us to track and compare our gross profitability from month to month / quarter to quarter / year to year etc              on a comparable basis (so that as we grow our businesses we can ensure that we are not becoming less profitable, or less efficient about how we make that profit}

  • Expenses – Also often referred to as ‘overheads’.

These are the ‘everyday’ expenses incurred in the running of the business, that do not relate specifically to a sale. Examples would include rent, utilities, travel, bank charges, stationery etc

  • Net Profit – This is a calculation expressed as an amount

Gross Profit – Overheads = Net Profit

That’s it. All the classic ‘complex accountant speak’, all the ‘but I’m not a numbers person’ commentary – 8 words in a picture. Earning a profit in business is about that image.

But it gets better:

These 8 words are all that we need to tell us what the 3 easy steps are going to be – I call them the 3 #profitlevers:

  1. Sales
  2. Margin
  3. Overhead

That’s right, this is all we need to tell us how to make a business more profitable. Want to see how to increase profit in business with just these 3 words? At the end of the day, we want to make business easy, don’t we?

How to increase profit and run a profitable business

We’re always on the lookout for simple ways to do things, especially when we feel out of our comfort zone (and many business owners and entrepreneurs don’t feel comfortable with ‘the numbers’, so know that you’re not alone if that’s you 😉). We want to find the techniques that resonate and are easy to grasp – we need to make business as simple as possible. Running a profitable business is no different…and here’s the proof of just how straightforward it can be…

We take our three #profitlevers and we line them up as follows as outlined in the diagram below:

How To Increase Profit - moving the 3 #profitlevers for increased profitability

The 3 #profitlevers – preferred direction of movement

So if we are looking for ways to improve business profitability, we need to focus on these three areas – sales, margin and overhead. These are the only 3 things that will ever increase profitability. Moreover, each single element can improve profit if we focus on it and taking the right actions appropriate to that #profitlever. We’ll take a look at how to maximise profit in business a little later.

Let’s break down that image above and check through the logic:

  1. If we increase our sales, whilst keeping our direct costs and our overheads at the same level, we will make more profit
  2. If we decrease our direct costs (ie increase our gross margin), whilst keeping both our sales and our overheads at the same level, we will make more profit
  3. If we decrease our overheads whilst keeping our sales and direct costs at the same level, we will make more profit

This is the single image and concept that every business owner and entrepreneur needs to keep at the forefront of their mind when trying to make your business more profitable – it doesn’t get any more complex than that.

This image will become your profitability compass:

When you’re short on profit, or need to proactively generate more profit, this is the go to model. It is the simplest model to understand, and it makes it easy to implement because we can break things down into simple strategies and tactics against each #profitlever which will keep us more focused on the task at hand – which in turn will help us to achieve our business and profit goals!

Let’s see the theory put into practice:

We can see from the example below, that just by changing each #profitlever (Sales, Margin, Overhead) by ‘2 units’ we can improve profit by 20% in this particular business model. A 20% uplift for such a small change is an amazing return.

It also helps us draw three conclusions:

  1. Increasing the profitability of a business can be done using a very simple concept
  2. A small change in the right direction for any one of the #profitlevers can have a dramatically positive effect on our profit, proving the fact that we don’t need to over-complicate things to create a high profit business.
  3. The concept and the maths is so straightforward, anyone who considers themselves to not be a ‘numbers person’ can see that this is not difficult to understand – consequently, there is no reason to hide from it any more!

How to increase profit - increasing profitability with small changes for disproportionately positive profit impact

The disproportionately positive profit effect of small changes to each #profitlever

Here’s how to make your business more profitable

Step 1 – Sales

  • Review your current sales and break them down into sales channels (type of client / customer etc) that you sell to, or into product and service types
  • Consider how you could increase the sales any one of those categories
  • Put your sales plan into action

Step 2 – Direct Costs & Expenses

  • List out all of your expenses into simple categories (I tend to use the following as a guide – admin wages and support, rent & rates, utilities, banking & finance charges, office costs including stationery, postage etc, premises expenses, professional and consultancy fees, travel & subsistence, phone and IT costs, marketing)
  • Now take that list and isolate any costs that are direct costs (ie relate directly to a sale, eg manufacturing or production costs, any labour cost that is dedicated to sales specifically (could be a sales rep, could be an ‘installer’ etc), and marketing costs that are dedicated to a sale (eg Facebook advertising costs as part of a sales funnel that leads directly to a sales page)

Step 3 – Review & Implement

  • Take the overheads listing first and review to see where you could reduce any expenses. Remember your objective here is to recognise the expenditure which is not adding to the effectiveness of running a profitable business – it is likely for example that there are subscriptions being paid for that are not being used (surprisingly common), along with other costs where expenditure has been ‘discretionary’ rather than ‘necessary’.
  • Remember not to discount reviewing any area – remove the costs that are unnecessary – or at least recalibrate them. The cumulative savings will add up. For example, you only need to save $50 on $2,500 of expenditure every month to recognise a 2% decrease – that’s worth $600 of extra profit every year…
  • Now review the direct costs and determine where you could make some savings – could you ask a supplier to reduce their prices by 1%? Could you pay closer attention to your Facebook advertising metrics to see where you might be wasting some money on adverts that aren’t converting? You could save 2% ($0.40) on a $20/day ad spend ($600/month total spend) just by stopping an underperforming ad one day sooner than you normally do, perhaps (ie get closer to the analysis piece sooner and make the decision!)

Steps – Summary & Comment

You can see that the key to all of the steps above is breaking things down into manageable pieces. This makes it easier for us to focus on how to improve net profit, because we can take a series of smaller but more focused actions to create a positive cumulative effect. Unfortunately this does mean that you have some work to do initially, but your bottom line will thank you for it for ever more!

How to maximise profit in business

Following on from what we have already seen above, extending the logic of the concept we can increase profit most effectively when we move all three of the #profitlevers at the same time, ie we will develop and work with each one of the #profitlevers as individual strategies, but we can run all three strategies at the same time so that we can create the following scenario:

Increase sales, decrease direct costs (increases gross margin), decrease overheads

[ctt template=”11″ link=”9dl44″ via=”yes” ]Increase sales, decrease direct costs (increases gross margin) and decrease overheads at the same time = most efficient profit growth[/ctt]

All of these can be happening concurrently. This compounds the positive effect on our overall profitability, so instead of making one change whilst leaving the other two #profitlevers constant, we are working towards moving all three #profitlevers together at the same time, thus multiplying the positive effect on our profitability.

Here’s the truly brilliant part of it:

We find out that we only need to make small changes to each #profitlever to create a relatively huge increase in profit and thus it makes it much more straightforward to see how we can create a very profitable business much more easily than we may have thought.

Action Point

Create an overall strategy for each one of the #profitlevers, and break each one down into a series of smaller tactical actions – then work against each tactic to create the benefit in a simple and manageable way (ie reduce the feeling of overwhelm). Remember that every action you take will help to compound the overall positive effect in creating a more profitable business.

How To Increase Profit In Your Business – Conclusion

We set out to show how to make your business more profitable – and we have also now seen that it only relies on three factors – sales, margin and overhead.

We have also seen why the concept is both simple to understand and universally applicable to all businesses. Every business will have some level of sales, direct costs and expenses – consequently, it has the three variables that we can influence to see how to make a company profitable.

We can also now see and understand why the concept is therefore geography neutral (it doesn’t matter where the business is based (including ‘at home’!), it is size neutral and it doesn’t matter whether it is service or product based.

  • I’d love to know which #profitlever you will be tackling first and why – please tell me below in the comments where you think you can make the most impact in the shortest period of time.

I’ll be cheering you on!

  • Click here to sign up to make sure you receive future posts about how to make your business more profitable.

Future topics will include:

  • Why business owners overcomplicate increasing profit
  • The mindset that you need to adopt in order to become a truly great ‘Profit Maker’
  • Why your accountant may not be the best business advisor for your business
  • Top money and accounting mistakes that entrepreneurs and business owners make
Here’s to focusing on efficient profitability!
Jason

 

Jason A WithersHi there Profit Seeker, I’m Jason!

I help online entrepreneurs and owner managed brick & mortar companies to build profitable businesses through the application of easy to understand business strategies.

I show you how to apply and implement the strategies, take the ‘fear’ out of the numbers and help you to become more confident about the financial aspects of your business that you really need to know about.

That means less stress for you so that you can focus on making the impact that you want to make with your clients and customers, safe in the knowledge that you know how to make your business more profitable for ever more.

You can run a very profitable business with ease and simplicity. I’m here to help you make it happen and keep you accountable to your goals, providing commercial and financial support and advice to help you on your way.

Learn more about the great work we can do together here:

https://jasonawithers.com

Or you can book a call here:

https://jasonawithers.com/schedule-a-call/

Only 3 Things….

Only 3 Things….

Too much hustle, not enough focus

It is a common question – “How do I make more profit?” All too often it is answered by thinking that the answer is to ‘do more’. Clearly, if you aren’t doing anything, then the answer will definitely start with that!

But ‘doing more’ must be the answer, because that’s how to scale a business, right? Doing more may well result in a ‘bigger’ business – bigger turnover (sales), bigger staff, bigger premises (for the brick and mortar businesses), bigger budgets, bigger marketing spend…and so the list goes on…and on…

The only thing is, ‘doing more’ may also add ‘bigger losses’ to the list as well. When ‘doing more’ goes unchecked, or even worse when there are no existing metrics in place to track any of this information through on a quarterly (at least) or monthly (preferably) basis, how can you possibly know that when you ‘do more’ it will result in ‘bigger profits’. And let’s face it, no-one wants to work harder for no extra benefit…

So if ‘doing more’ isn’t the answer, then what is? PS – it may be the case that ‘doing more’ is the right thing, but we need to make sure that we do more of the efficient and effective things when it comes to profit generation.

We need a plan – we need focus. The question “How do I make more profit?” is too big a question in itself to answer sensibly – there are *millions* of ways in which we could make more profit – the secret lies in simplicity and being able to focus on strategy and consequent tactics in such a way that we can break down the question into some bite-sized chunks. Quite apart from anything else, as a business owner/entrepreneur, it’s not like you don’t have anything else to be working on day to day in your business, is it?

So here’s a simple 3 part plan for you – take action, and you will see positive results:

Sales

It is not just about selling more – you need to understand who you are selling what to first. You need to understand your breakdown of clients.

Think about it like this: if all you see on a financial report is:

‘Sales = x’, that doesn’t really help you that much.

Imagine however it looked like this:

‘Sales (domestic) = y’, and

‘Sales (international) = z’

And when added together, these now made up the line: ‘Total Sales = x’

You now have a lot more information about your sales – the relative proportions of your domestic and international clients by their sales levels. Think about what you could now do if you understood that your domestic sales were 1%, 10%, 25%, 50%, 75%, 90% etc of the total – how would that start to guide your thinking? Is it easier or harder / more or less expensive to reach domestic customers? Are you vulnerable in your domestic market for some reason that means you need to focus on international growth perhaps? Is it easy to get your products registered in international territories? Is there a long lead time attached to that? Do international customers place larger orders, but maybe less frequently?

Your ability to think more clearly about the ways in which you may choose to expend energy in the pursuit of profit (‘do more’) is now far more apparent.

Margin

Let’s start with understanding what margin actually is:

Sales – Cost of Goods Sold (Direct Costs) = Gross Profit ($)

Gross Profit / Sales = Gross Margin (%)

So, it is basically what is left once we take away the cost of making the goods that we actually sold (for a product based business). For a service-based business, it is the cost of the labour that actually ‘did the work’.

Simply put, therefore, we need to understand how much gross profit we make (margin) for each of the products that we make (or serve with). Similar to the example with sales, understanding which products/services yield the greatest amount of gross profit will, therefore, help us determine which products/services we want to invest our time in producing and selling – where is the most gross profit to be made? We can then check as we grow what happens to our gross margin overall.

Overheads

Whilst sales and margin are typically things that we feel we need to increase, overheads (expenses) are things that need to be reduced. As businesses grow, they tend to ‘bloat’ from an overhead point of view – because there is ostensibly more ‘money’ available, we tend to think that we have more to spend, but all too often, the spending is not focused and effective. Consequently, costs rise and turnover (along with gross profit) doesn’t necessarily rise as well.

Imagine spending additional money on a certain type of marketing expense when you don’t actually know whether or not that type of marketing produces a return (or specifically can’t be matched to an upturn in sales).

The second issue with overheads is that people tend to look for the ‘extras’, rather than the items where the money is really being spent – consequently, people can spend a huge amount of effort and time trying to cut down a stationery bill, when that may only be a relatively small part of the overall expenditure, whilst simultaneously ignoring their administrative staff cost, or the fuel bill which may be far more material costs to the business – if these are being overspent on because of poor management, then dealing with these issues will help the bottom line far more than changing stationery supplier. You have to be aware of the relativity of each type of expense against the others, and its overall impact on the business first.

So – review your overheads, and for simplicity, break them down into categories – I often find that I will start to review a business based on the following broad categories:

Admin Salaries and associated employment costs

Property Costs and associated expenses (eg rent, rates, utilities)

Premises Costs (repairs & renewals, cleaning etc)

Insurance

Professional, Consulting, HR, Financial & Legal

Bank Charges and Finance Costs

Motor Expenses (including Vehicle Insurance, Fuel, Vehicle Tax, Parking, Mileage etc)

Travel & Subsistence

Entertainment

General Office Expenses (stationery, telephone, postage, computer supplies etc)

Marketing (split online / offline)

Subscriptions

You will find this a much easier task if you break the expenses down into ‘similar’ things – that way you get to consider a section ‘as a whole’ for its impact (good, necessary or bad) as well.

Conclusion

Less hustle, more focus has to be the way forward (unless you enjoy doing lots of work for little potential benefit). It is the way to create a profit intentionally in your business.

PS – Sales, Margin and Overhead are the only 3 things that you have to manipulate and improve your profitability with – so focus specifically on them to generate the best result – don’t waste your time trying to answer that ‘big’ question!