It can be difficult for small business owners to determine what success looks like, as there is no ‘one size fits all’ model. One of the largest disparities is products vs. services, and for professional service firms, income is often tied to hours; thus, many owners feel that ‘increased success’ is just more work.
However, business revenue is only one way to measure success, and sometimes, there is a desire to increase the top line without considering the bottom line. While increasing revenue looks impressive, it is not the best way to measure the overall performance of the business.
One of the most common and simple ways to measure business performance is continuously reviewing the net profit and net profit margins. To find out how to calculate your net profit and net profit margin, see: Net Profit Benchmark Calculation
Many small business owners monitor net profit as it is an accurate reflection of how well the business is performing, but net profit margins are sometimes neglected. When setting strategies, net profit margins should be considered, as they can support business owners and determine areas for continuous improvement.
But how do I know what my net profit margin should be?
Arguably, it can be difficult to determine what is a good/high margin vs. a bad/low margin, which is a key reason net profit margins are ignored. This is primarily due to the vastly different margin figures across industries. Furthermore, business size, age and even location can impact the average margin. Service businesses generally have higher profit margins than their goods counterparts, as their cost of goods are much lower or non-existent. [1]
When determining what your net profit margin should be, one of the best approaches is to benchmark your business against other businesses that are in similar industries, of a similar size and in the same location.
For professional service firms, net profit margins vary due to the hourly rates charged, employee productivity, insurance, fixed costs and office requirements. Therefore, it is vital that business owners calculate their desired margins against similar businesses in return for more accurate results.
Once the target is established, all professional service businesses can ask three simple questions to determine if they can improve their net profit margin, and thus, their bottom line:
- Are we spending too much money?
- Are our employees productive enough?
- Are our customers happy?
1. Are you spending too much?
Improving your net profit margins means that you will make more money without having to, well, make more money!
The quickest way to improve the bottom line is to simply cut back on expenses. But this is much easier said than done. For many in professional service businesses, 100% of expenses are fixed costs, and therefore it can feel like there is minimal room for growth.
A simple way to see if the business is spending too much (or too little) is to benchmark expenses. This is undertaken by comparing the business’ expenses ratio to other businesses in the same industry. The benchmark report provides business owners with exactly this. It compares costs such as advertising, rent, insurance, salaries and more, enabling owners to determine opportunities for improvement when it comes to managing expenses.
2. Are your employees productive?
‘Clients do not come first. Employees come first. If you take care of your employees, they will take care of the clients.’ Richard Branson
Increasing income with the same resources should be a goal for any service business.
For product-based businesses, increasing revenue can be as simple as purchasing, or creating, additional goods. Yet for services, it can be difficult to achieve a higher output with the same resources, and simply employing more staff can be highly costly and may not lead to increased net profits. See our blog on the FTE Equilibrium here.
Every business owner arguably wants their employees to achieve optimum performance levels. But how do you know if you have high-performing employees? This can be done by better understanding not only what your employee productivity is, but also the benchmark for your industry. Find out more about measuring productivity.
Productivity can be increased in many ways, including investing in technology, training and restructuring. However, a win-win way to increase productivity is to increase employee happiness.
An extensive study into happiness and productivity has found that workers are 13% more productive when happy.[2]
3. Are your customers satisfied?
Focusing on satisfying your customers can impact both the top line and the bottom line. There is much research that shows satisfied customers spend more, and shop more, than those who are less engaged.[3] While this directly increases your revenue, repeat business can reduce marketing and business development costs, resulting in a higher net profit margin. For professional service firms, each customer/client is often already high value, therefore firms should put in place relationship management strategies to increase customer retention.
Furthermore, happy customers will provide referrals, which is arguably the ultimate marketing win.
Again and again, the stats show that customers who come in through referral are more likely to purchase.[4]
There is no argument against the idea that new customers can create more revenue, but it is always worth reviewing your customer services to see if you can create higher value for your existing customer base.
Beyond the bottom line
In addition to happy customers and employees, business owners should not forget to look inward. Maintaining, or developing, a work-life balance should be considered a key goal for owners to assist in managing the stress of running a business.
This is particularly important right now. 2020 has thrown the global business community into unprecedented times, and according to LinkedIn, signs of burnout have risen 33% during this period[5].
There have been notable rises in the use of crisis lines and mental health services since the onset of the COVID-19 pandemic. For example, calls to Lifeline in the four weeks from 10 August to 6 September 2020 were up 15.3% compared with the same timeframe in 2019. Contacts to Beyond Blue (total of call, web chat and email) were up 38.6% over the same period.[6]
While having a sustainable and financially-viable business ensures success in its traditional form, business owners should also make sure the business meets their personal needs, and that there is enough downtime to refresh.
The bottom line: know what your success looks like
At the end of the day, each business owner will have their own idea of what success is, but it is important that this is defined. Once defined, strategies can be developed to achieve it, and it can be monitored to ensure continuous improvement.
Every Business Owner Should Define What Success Looks Like[7] –
Harvard Business Review
Undertaking internal benchmarking on an annual basis gives business owners a true reflection on how the business is performing. It provides an opportunity to not only identify gaps and improve performance, but also engage with employees and customers.
In addition, goals give owners an opportunity to celebrate successes, enjoy their achievements, and most importantly, make sure the business is working for them, because overall, that should be the bottom line.
Interested in benchmarking your clients? We offer a free trial of our Benchmark Suite Reports to accountants and business advisors, click below to benchmark one of your clients today.
[1] https://www.investopedia.com/articles/personal-finance/093015/whats-good-profit-margin-new-business.asp
[2] https://www.ox.ac.uk/news/2019-10-24-happy-workers-are-13-more-productive#:~:text=An%20extensive%20study%20into%20happiness,13%25%20more%20productive%20when%20happy.&text=’We%20found%20that%20when%20workers,%2C’%20said%20Professor%20De%20Neve.
[3]https://www.researchgate.net/publication/228338392_Do_Satisfied_Customers_Buy_More_Examining_Moderating_Influences_in_a_Retailing_Context
[4] https://www.extole.com/blog/15-referral-marketing-statistics-you-need-to-know
[5]https://www.linkedin.com/pulse/burnout-signs-have-risen-33-2020-here-seven-ways-reduce-george-anders/
[6]https://www.aihw.gov.au/suicide-self-harm-monitoring/data/covid-19
[7] https://hbr.org/2019/08/before-you-start-a-business-decide-what-success-looks-like