How much is enough profit?

January 8th, 2020     More profit, News

“Am I making enough money?”

It’s a question we’re regularly asked by clients, but one we cannot answer on the spot. Profitability is a complex equation, made up of many finer calculations.

Truthfully, there is no right or wrong amount of profit you should be making. It all boils down to you, your business, and your ambitions.

But there are ways we can boost profitability, and that’s by benchmarking it against others, deconstructing your business processes, and creating value.

How do you stack up?

It’s important to benchmark your business. Without this information, how would you ever know if you were performing poorly or above the industry standard?

How we measure your business against competitors

Firstly, we select key performance indicators (KPIs) which underpin the success of your firm. These differ by sector. Manufacturing businesses, for example, rely on the efficiency of the production line, while retailers are dependent on gross margins.

The next step is choosing who to benchmark your business against. The ideal dataset is comprised of competitors in your region of similar size and age. It may be helpful, however, to benchmark against larger competitors to gain an understanding of what your one, five and even 10-year goals might look like. Looking closely at larger competitors is also advantageous as they are likely leading the line in terms of innovation, productivity and development.

So, where do we find these figures? There’s two approaches. The first is to go out and assess your competitors yourself. Search public records and local press publications, and be prepared to use your own figures as leverage to obtain others.

The second approach is using external benchmarking data. While often hidden behind a paywall, there are some free services.

Benchmark Index, as recommended by the Institute of Chartered Accountants in England and Wales (ICAEW), offers basic data free of charge to businesses.

If you’re interested in finding out more about benchmarking solutions, get in touch here.

Deconstruct your business with management accounting

While it’s true that management accounts help you better manage what you measure, clients are surprised when we tell them that management accounts can improve profitability.

Why use management accounts

Management accounts ensure that the numbers make sense. They tell you why, rather than what. Completed on a monthly or quarterly basis, management accounts enable us to deconstruct our business, breaking down the performance of each department, process or team. This might result in the identification of a high growth service, an unprofitable product or an underperforming factory floor.

Armed with the right information, business owners can make better-informed strategic decisions about their company.

Sales optimisation, for example, is an important factor in profitability. But without knowing what services or products are making you the most money, we cannot capitalise on high-growth areas of your business. For example, could you benefit by refocusing your efforts on other, more profitable services?

What key information could you gain from management accounts?

  • Sales by region
  • Online versus offline sales
  • Sales by product or service
  • Productivity per site
  • Wastage per site
  • Expenditure per department
  • Trends in the cost of supplies
  • Cash flow
  • Unusually high or low periods of productivity or sales
  • Late payments
  • And more…

Improving profitability

So you’ve benchmarked your performance and deconstructed your business with management accounting. Now what?

While there are several ways to increase profitability, we’re going to look at just five: costs management, budgeting, pricing strategy, productivity and research and development (R&D).

Costs management: the golden rule with costs management is that there are always savings to be made. It’s best practice to review your suppliers and distributors at least once a year, ensuring you are bargaining for the best deal. After all, they want your custom as much as you need theirs.

Budget: are you managing your budget, or is your budget managing you? If you regularly find yourself going over budget, it might be wise to implement new controls to stay on top of your spending. Applications such as Xero, QuickBooks and Sage have interactive features and autonomous reporting tools which might make managing your budget less of an ordeal.

Pricing: when was the last time you reviewed your pricing strategy? How do you compare to competitors? Are you facing competition online? Carry out a comprehensive review of your market on a monthly or quarterly basis to stay ahead of the competition.

Productivity: optimise your resources and be the best at what you do. Abandon products or services that make you little money and focus core investment on the ones that make you the most profits. In practice, this might mean breaking off an arm of your business, outsourcing an existing in-house service or relocating.

Research & development: is it time to refresh your range? The Government’s extremely generous R&D Tax Credit scheme enables you to invest in your business while deducting an additional 130 per cent of the qualifying costs from your yearly profits, as well as the normal 100% deduction.

We work with business owners to build the businesses they need to have the life they want, so if you want to talk about how to grow business, get in touch with me on 01803 296678 or email andrew.price@andrewprice.co.uk