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.
FAQs
Ranking your profit drivers
The top profit drivers common to most businesses include: increasing sales (turnover) improving gross profit by either increasing price or reducing input costs. reducing overhead expenses by improving efficiency.
How do you get profit from your business? ›
Ranking your profit drivers
The top profit drivers common to most businesses include: increasing sales (turnover) improving gross profit by either increasing price or reducing input costs. reducing overhead expenses by improving efficiency.
How do you take profit from a business? ›
There are three main routes for a business owner to extract profits from their own Ltd company: salary, dividends and pension contributions (although this is taking money from the company for future use). The other alternative is to leave the profit in your company and take the proceeds from the subsequent sale.
How can I grow my business profit? ›
Increase your profitability
- Four ways to increase business profitability.
- Manage your costs.
- Review your offer.
- Buy more effectively.
- Concentrate your sales efforts.
- Expand your market.
- Boost productivity.
- Checklist: improving the profitability of your business.
Adopting cost-effective strategies, leveraging technology, and negotiating with suppliers can significantly reduce operational costs. Every dollar saved is a dollar added to your profits. Recognizing and trimming down excess expenses is a vital step toward running a profitable business.
Is 30% profit margin good? ›
In most industries, 30% is a very high net profit margin. Companies with a profit margin of 20% generally show strong financial health. If this metric drops to around 5% or lower, most businesses will need to make changes to remain sustainable.
Which business is most profitable? ›
- Party Rental Business. ...
- Sewing and Alterations Shop. ...
- Gently Used Maternity Clothing Shop. ...
- Cleaning Service. ...
- Virtual Assistant. ...
- Social Media Management. ...
- Accounting and Bookkeeping. ...
- Consulting. Starting a consulting business is a great way to tap into your years of experience and expertise in a given field.
But in general, a healthy profit margin for a small business tends to range anywhere between 7% to 10%. Keep in mind, though, that certain businesses may see lower margins, such as retail or food-related companies. That's because they tend to have higher overhead costs.
How long until a business is profitable? ›
On average, businesses take two to three years to become profitable. However, many factors determine profitability — while some small businesses fail within the first year, others with low start-up costs can even be profitable in the first year.
What is the average profit of a small business? ›
As reported by the Corporate Finance Institute, the average net profit for small businesses is about 10 percent. Here are some examples reported by New York University—note the wide range of actual profit margins reported in the study: Banks: 31.31% to 32.61% Financial Services: 8.87% to 32.33%
10 Ways to Get New Customers
- Ask for referrals. ...
- Network. ...
- Offer discounts and incentives for new customers only. ...
- Re-contact old customers. ...
- Improve your website. ...
- Partner with complementary businesses. ...
- Promote your expertise. ...
- Use online reviews to your advantage.
"There are only three ways to increase your business: get more customers, increase your average transaction size, and increase the frequency of purchase." ✋ Let's face it - running a business can be tough.
How to run a successful business? ›
- Get Organized.
- Keep Detailed Records.
- Analyze Your Competition.
- Understand the Risks & Rewards.
- Be Creative.
- Stay Focused on Your Goals.
- Provide Great Customer Service.
- Be Consistent.
Some of the easiest home businesses to start include a dog walking business, an Etsy store and a tutoring business. All three of those businesses have low startup costs and low ongoing costs.
What businesses have the highest success rate? ›
Top 10 most successful businesses to start
- Social media management. ...
- Cleaning service. ...
- Business consulting. ...
- Copywriting. ...
- Graphic design. ...
- Real estate brokers. ...
- Online courses. ...
- Pet services. For those who love our furry friends, starting a pet service business may sound like a dream job.
10 business tips for success
- Get organized and plan. Creating diligent plans and being organized can help you create a foundation for success. ...
- Keep detailed records. ...
- Learn about your competitors. ...
- Understand the risks and rewards. ...
- Focus on customer service. ...
- Expand your marketing efforts. ...
- Be creative. ...
- Stay focused.
As reported by the Corporate Finance Institute, the average net profit for small businesses is about 10 percent. Here are some examples reported by New York University—note the wide range of actual profit margins reported in the study: Banks: 31.31% to 32.61% Financial Services: 8.87% to 32.33%
How many years does a business have to show a profit? ›
As long as you made a profit in three of the past five tax years (including the current year), the IRS considers your business a for-profit activity. (If your business is breeding, showing, training, or racing horses, you only have to show a profit in two of the last seven tax years.)
What is a good profit percentage for a business? ›
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
