Business Advice

(Part 3 of 3) The Profit Formula

Date 19th June 2018

In this blog series I will look at how you can make your business bottom line healthier.

Please read section 1 & 2 of this post available here before continuing with this post.

The action steps last week was to open a second business bank account for the business.

Also you should know the tax you need to pay from your latest tax return.

Section 3

The formula for profit.  

Sitting down with your accountant at your financial year end review should not be the first time you find out that you have made a profit.

At a minimum modern business owners should have quarterly accounts prepared and reviewed by your accountant. You should know the exact profit your business is making in real time so you can prepare for future taxes.

But imagine if you knew today what profit your business was going to make next year, even before you made a sale. That would be incredible and is very possible for the right type of businesses.

Firstly you need to have an idea of the profit your business can make. To figure this out research a floated company in a similar business to you own.

Look at an international company which operates in your industry. Go on Google and see the profit this company has made in the last 4 quarters. If this company can record a 20% profit for the quarter then why can’t your business.

It time to take baby steps.  Open a third bank account and at the end of every month deposit 1% of the sales made that month. This is your profit account this will accumulate profits each month which you don’t use to pay for items in the business.

As the quarters tick by, you should increase the amount allocated until you reach or exceed the quarterly profit which your floated company is reporting.

Example

Mary has a café which is located in Sligo; she has implemented stages one and two of this series. She has started to pay herself a better wages than what she had in the past.  She has reduced the operating costs of the business to a level where she can now implement stage three.

She has implemented the necessary processes and procedures in her business which ensures her customers get a great product and service every time.

A business Mary will use as a benchmark is Starbucks. To date the company has a quarterly profit has varied between 17% – 20% for 2016. From her last financial statements she recorded a net profit of 9% for the year.

Now it is time that you started acting like an international business. If Starbucks can achieve these profits then why can’t you.

To start off I would suggest Mary take 1% of all monthly sales and place it in the third bank account for the next quarter. As you save more on expenses and look to streamline your business, increase in the percentage, but not by more than double the previous quarter.

Year 1                       Year 2                       Year 3

Q1 Profit 1%              Q1 Profit 7%              Maintain the profit.

Q2 Profit 2%             Q2 Profit 10%

Q3 Profit 3%             Q3 Profit 15%

Q4 Profit 4.5%          Q4 Profit 22.5%

The goal is not to allocate the maximum amount of profit in the shortest amount of time but rather to be able to achieve the profit while you maintain the healthiest possible business. This is not a blue print; different businesses will achieve the profit percentage in different time frames.

A business should never be judged on the value of sales it makes, but rather on the profit it generates on those sales.

If you want to implement any of the topics discussed in the blog series for your own business, be sure to get in touch.

Conclusion

If your business is not actively looking to grow profitability, they fall into the trap of staying stagnant.  If a global company records an increase in sales and this does not result in an increase in profit there could result in a drop in their share price. The CEO has to come before the shareholders to explain themselves.

As a business owner you may not view your business with the same eyes as a global company does, but perhaps you should.

I hope you have been able to get some benefit from this post.

If you wish to discuss any of the ideas discussed in this series and see how they can help you send a email to info@myca.ie