For most business owners, steering their enterprise to success is about seeing opportunity and building relationships.
They prefer to leave the hardcore mathematics around profit and turnover to their bookkeeper and accountant and focus on the big picture.
But two big truths are missing from that scenario: a business owner that knows their numbers operates with a massive advantage, and that knowledge is well within their reach.
Numbers are the language of business; if you don’t understand your numbers, how are you supposed to comprehend what your business is telling you?
We often quote investor Warren Buffett at MWM Advisory and will happily do so again here:
“If you can’t read the scoreboard, you don’t know the score, and if you don’t know the score you can’t tell the winners from the losers,” he says.
Business owners don’t need an accounting degree, but a fundamental understanding of their fundamentals is going to supercharge their business acumen.
So let’s get you started!
Turnover, Profit and Cash
To grasp ‘the big three’ and what they mean, memorise this phrase:
“Turnover’s vanity, profit’s sanity, but cash is king.”
Turnover is your sales, income or revenue. Every business needs sales and a lot of your time and resources should go into driving sales through the business.
Profit is the reason you’re in business. It’s your return for the effort, money and assets you put into your business.
If you’re not earning enough profit you may as well invest your money elsewhere and put your efforts into something else… and that’s why profit is sanity.
Cashflow is the heartbeat of your business. When your cash runs out your business dies, so cash is king!
As the business owner, therefore, you must fully understand how cash works within your structure and be in full control of it.
Your numbers in practice
Knowing your numbers puts potential at your fingertips – the potential to implement workable commercial strategies and grow.
Just grasping the relationship between your net profit and gross profit can unlock that potential.
A small adjustment to gross profit can make a big difference to your net profit (AKA the reason you’re in business!).
Let’s put gross profit at 30% on $1,000,000 of sales, that’s $300,000. The net profit margin at 10% is $100,000.
I’m sure raising your gross profit by 10% seems appealing, but pushing your margin from 30% to 40% sounds like a challenge.
But hold up – a 10% increase in gross profit doesn’t mean going from 30% to 40%, it’s only a 10% increase on 30% – an additional 3%.
See how much easier knowing your numbers makes things?
Taking your gross profit margin from 30% to 33% is achievable; just about any business could increase their margins by 10%.
But what does that do to your net profit or ‘the bottom line’?
Your gross profit goes up to $330,000.
Because nothing else has changed, all of the extra gross profit goes straight onto your net profit – in this case from $100,000 to $130,000, a 30% increase.
— that’s a 30% increase to your net profit just by improving your gross profit percentage by 10%.
To increase your gross margins, MWM Advisory recommend the below strategies. Not all will be relevant in your business, but any one could add 10% onto your gross profit:
- Know your actual margins
- Make sure you price for profit
- Make sure you’re effective, efficient and productive
- Set team targets based on margins and reward results
- Sell more big-margin products or services
By knowing your fundamentals, you might also increase your net profit directly.
By focusing on reducing your overheads, you can identify waste in fixed costs and find significant savings.
For the above example, a 10% saving on your overheads could be a saving of $20,000, taking your net profit to $150,000.
In other words, a 10% saving translates to a 50% increase in net profit.
Our favoured strategies for increasing net profit are:
- Aim to reduce all costs by at least 10%
- Set and monitor all budgets
- Keep your private expenses under control
If you’d like to get some business accounts training so you can start operating with an advantage, talk to us about the KickStart program.
Through the KickStart we can train you on your accounts and work with you on how to improve them. Call us today on 07 5596 9070.