Reaching your full (business profit) potential

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What’s a good profit?

A ‘good’ business profit can be hard to define. It varies based on business type, industry, circumstance, business size and owner objectives. Therefore, what may be a great result for one business, may be dismal for another.

But, what is beneficial for all business owners is setting realistic profit-based goals so they can reach their profit potential. Yet, before goals are established, it is vital to define what the profit potential is.

Profit terms: Gross. Net. Margins.

In short, the word ‘profit’ alone can mean multiple terms. Therefore, you and/or your client should always know what ‘profit’ you want to assess.

Gross  Profit Net Profit
Gross Profit refers to the income earned after subtracting the variable costs or the cost of goods sold. Variable costs (cost of goods sold) are related to the production of goods and thus increase and decrease as more – or less – products are created. Net Profit calculates the business revenue, minus the total costs. This includes cost of goods sold and all fixed costs. Fixed costs refer to items such as rent, wages and insurances as these items typically do not directly correlate with production variations.
Calculation: Calculation:
Gross Profit = Revenue – Cost of Goods Sold Net Profit = Revenue – Total Costs
Gross  Profit Margin Net Profit Margin
The gross profit margin is an important metric for goods-based businesses. It is the percentage of revenue earned after deducting variable costs. Net Profit Margin assesses the Net profit against the total income.
Calculation: Calculation:
Gross Profit = Revenue – Cost of Goods Sold Net Profit = Revenue – Total Costs
Note: a truer reflection of business performance for business owners is Net Profit Before Owner/Principal Salaries. Read More Here.

The Profit Gap vs. Profit Gap Analysis

A profit gap is broadly defined as the difference between the desired business net/gross profit and the current figure. However, a profit gap analysis reviews what the potential profit could be by evaluating specific cost metrics.

The Profit Potential

In addition to undertaking an analytical approach to setting profit goals, business owners can compare their profit potential to the profit of their competitors. Consequently, this enables business owners to assess where they excel and where they can improve.

The Benchmarking Suite includes a Profit Gap Analysis for your client’s business. Download a sample report today!

For example, a business may find their gross profits are excelling but they are lagging in overall net profits. As a result, they can focus on reducing fixed costs. This may include reviewing employee performance/overheads, assessing rent and office costs and/or analysing asset expenses.

For businesses with low gross profits, owners may look to either increase sale prices or look to reduce input costs by renegotiating contracts, bulk ordering or substituting inputs.

Improving the bottom line

When looking at profits, business that sell and produce goods should ensure they assess gross profits and gross profit margins. However, all businesses, both service and product businesses, should focus on net profits.

To start improving the bottom line (aka, the net profit) business owners and consultants can look at the following areas to assess their potential profit and build focused strategies:

  1. Employee overheads: firstly, owners can review employee costs to assess what percentage of income is spent on employees. Service businesses usually experience higher costs compared to retail or manufacturing industries. When assessing this cost, business owners should review their overall FTE count to ensure all roles are still relevant to the business.
  2. Employee productivity: there are many ways to track and review employee productivity. For instance, you can measure employee productivity growth by reviewing total income per FTE and tracking this figure over time. However, to gain a more accurate picture of employee productivity, business owners can run a benchmarking exercise. This compares their income to FTE ratio against competitors; enabling owners to decide if they should focus on improving this metric.
  3. Fixed costs: one of the quickest ways to increase net profits is to decrease fixed costs. But it’s easier said than done. Therefore, business owners can schedule regular reviews of fixed costs to ensure the business is not spending on redundant expenses.
  4. Leveraging assets: an asset review highlights potential cost savings across the business. For example, an audit can determine assets that are outdated and require updating/sale, or assets that can be better utilised. Leveraging assets can further increase overall productivity, thus increasing revenue with no additional fixed costs to the business.
  5. COGS: cost of goods sold (COGS) are mostly related to industries with product sales. For instance: retail, manufacturing, construction, agriculture, and wholesaling. However, in some circumstances, other industries may also have variable costs. Although COGS relate directly to gross profits, they also form part of the net profit calculation and therefore should be reviewed regularly.

Benchmark to determine your client’s profit potential

Benchmarking your client against their competitors is one of the most accurate ways to build a realistic profit potential. Because you gain clear insights into how well they are doing in the industry, and where they can improve.

The Benchmarking Suite includes a profit gap analysis as part of the standard report. The section reviews a range of business metrics and compares your client’s results to industry benchmarks. Subsequently, our tool calculates the additional profit your client could earn if they implemented strategies to close their profit gap. Enabling you to support them make data driven decisions to grow their business.

We offer a FREE TRIAL of our suite to accountants and business advisors so you can see how our insights can give your clients a competitive edge.

GET YOUR FREE TRIAL TODAY

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