Are you looking to be the most profitable business in your industry?
Is it important to you whether make a decent profit or not?
If the answer to either of these questions is NO then can I suggest you stop reading right now because what I’m going to say in this blog post will have no relevance to you and you may want to do something more important.
Measuring profit in a business is a key element in making sure that when you do business with your customers you’re doing that in a sustainable way.
Many business owners fail to build a most profitable business while still bringing value to their customers and satisfying the needs of those customers.
This leads to failure in the long haul because there is insufficient profit in the transaction for them to remain viable.
As a business owner you will have at least three forces at you every day with regard to making a profit.
On the day you do your tax return you want the profit to be low so you pay little or no tax
On the day you tell your partner about your business you want the profit to be really high so they’ll believe you’re successful
On the day you want to borrow money from the bank you want the profit to be really high so they’ll lend you the money
Now which of these times do you make sure that the numbers are really right. You may say all the time but the profits of a company come under the most scrutiny regarding profit when you’re doing your tax because if you get that wrong you have to reach into your pocket and find money to pay the tax man and I rarely meet small business owners who enjoy doing that.
This means that often subconsciously the business owner doesn’t want to make profit or more likely subconsciously believes that profit is only a number which is manipulated and has little to do with measuring real success.
So they don’t place a high value of the book keeping in their business.
Now if you’re not one of those and really want to have a most profitable business then there are five components that you need to consider:
1. Sales Price
If you sell your products or services at a price that is too low then you’ll never make a profit. The only issue for you is convincing your customer of the value that’s in that price but you must do this in order to achieve good profitability
2. Sales Volume
It’s one thing to convince the close people around you that you’re selling them good value but in order to have good profitability you must convince at least a niche number of customers you’re providing good value or you simply won’t have enough customers to achieve good profitability
3. Costs to service customers
When you try and service customers you will need to spend money to do that. I like to call this ‘interaction costs with customers’ and it includes the costs of your products, people, marketing and distribution.
If these costs are too high then you won’t achieve good profitability. Sometimes customers fail to realise the costs associated in what they’re asking for and as business owners we can over deliver and under price which only gives the customer a better deal and leaves us out of pocket!
4. Margin
You may have heard the term Gross Margin or simply Margin. When you hear this it is important to know how it is calculated because you can get very different answers depending on what you include in margin.
In our business we use a term ‘contribution margin’ which includes ALL the costs required to interact with our customers. You can read about those above but we have found that we must achieve a 20% contribution margin or else our business struggles. And this MUST include ALL the costs of the business owner as well!
5. Expenses
Expenses in a business make all the difference between making a loss or a profit. If you took all your income and subtracted all your expenses then you’d have a profit (or loss!).
Minimising your expenses will ensure that you end up with a most profitable business but it is important to realise that sometimes in reducing expenses you can damage your business.
If you have an expense such as advertising which will bring in more customers and compare that to rent which won’t necessarily bring in more customers then you need to distinguish between them or you might make a mistake.
We like to make this distinction by calling some of our expenses ‘costs for interacting with customers’ and include those costs in our margin and ‘infrastructure expenses’ which we include after the margin.
This helps us think about the type of expense as well as how big it is.
In developing a most profitable business you will need to consider these five factors as they make up the different pieces for achieving high profitability.
How do you make up your profit and loss account and measure whether you’re successful?












