You have a business and your revenue is looking healthy. Sales are growing but you feel like you don’t have much money left over each month after paying all your bills. To make matters worse you feel like you’re run off your feet. Is this familiar to you? It’s time to look at your profits.
The simplest way to make more money is to increase your profit margin. Do more with what you have. But where do you start?
First, work out what your profit margins are. You need to calculate your Gross Profit. Your Gross profit is your revenue (or total sales) minus the costs of making those products (Cost of Goods Sold), or providing a service (Cost of Sales). These are also known as direct costs as they directly relate to your ability to make a sale. This represents the true income of a business. It is how much your business makes once the costs associated with providing the good or services are taken away.
What kinds of things are included in your COGS or COS? Well – any raw materials used in producing your products, direct labour, shipping costs, sales commissions. The easiest way to determine whether something is part of your COGS or COS is to ask yourself – ‘would I incur the expense if I didn’t make a sale today?’
Once you know your Gross Profit – you then need to work out your Net Profit (you might hear it also being called the ‘bottom line’). This is what you as a business owner take home at the end of the day. It consists of your Gross Profit, minus all of your overheads.
Your overheads consist of all your expenses related to having your business. Your rent, your staff, your marketing, accounting costs, advertising. These are your indirect costs. If you were to open your business tomorrow – these are the things that you have to spend just to keep the doors open.
So, calculate your net profit. It might be looking a little sad right? While your sales look strong, once you take away all your bills, expenses – this is what you’re left with.
How can you improve your profits?
Thankfully there are some simple way to improve your net profits that are easy to implement:
- Reduce your direct costs. Can your sales team be more efficient? Should you reduce their commissions? Can you renegotiate goods from your suppliers? Reducing the costs directly associated with making a sale will increase your Gross Profit.
- Reduce your indirect costs. Do you really need all that stationery. Are your entertainment expenses getting a bit high? Are travel expenses eating away at your profits? Should you downsize your office in the CBD? Are you spending too much on advertising – and what is your ROI? Take a fine tooth comb to your overheads.
- Increase the prices of your products of services. This is an easy one. If you want to make more money, simply sell what you have for more. Revenue after all is a function of quantity x price. Often business owners are hesitant to raise their prices for fear of losing clients – but in reality most clients would expect the price to go up over time. It’s a cost of doing business with a good operator.
What net profit % should I be aiming for?
Your net profit percentage goals should be a minimum of 15-20%. Obviously the higher the better – and if you can get your net profit to 30-40% you’ll have on your hands a truly enduring business.
There’s an old saying – sales is vanity, profit is sanity. By focusing on improving your profits you have more options available to you in where you take your business, and you have a greater chance of achieving sustainable success.
Here at Digit we work with small business owners to educate them on their numbers. The way we see it – profitable businesses are happier (and sustainable) ones. If you would like to find out more about yours – get in touch for a coffee.