Do You Know How Much Profit You Make?
I’m married to an accountant. That makes me happy for many reasons. But it does not always make my life easy…
When using a spreadsheet, she was the first point of contact to ask how to use a feature or set up a formula. I would end up calling her repeatedly seeking advice on the same topic. She’s no slouch, my wife; she soon cottoned on to me.
Eventually I cottoned on to her reply, “Ask Mr. Google!”
My plight deteriorated when we installed an accounting system. The agreement was that I would take care of issuing invoices and reconciling debtors. Despite studying Mathematics at University, I wasn’t enamoured with the task of administrating my finances!
I’m probably not too dissimilar to many of my entrepreneurial clients. We want to focus on building our business — not our administration skills!
However, there was a silver lining… I took an interest in GL (General Ledger) codes and where to allocate my expenditure, and realised the importance of including local tax (Goods & Services Tax — GST) that we have to pay and charge for in New Zealand.
My initial outlay in products and services required to run my business meant that I was eligible for GST refunds on a bi-monthly basis (it’s always nice to receive money INTO your account). But this trend hid an underlying message… I was spending MORE than I was RECEIVING!
I know, it doesn’t take an Einstein to figure that one out. But how many business owners prefer to stick their head in the sand and ignore the elephant in the room?
As I grew more curious about my business, I started to analyse the figures and whilst it took me a while to achieve, I eventually started paying GST as my business showed profit.
In my role as Education Coordinator in my local BNI Chapter, I spoke about getting a Return on Investment (ROI) from our membership. Let’s assume that the annualised cost for BNI is $1,800, and Income Tax is 33%, I posed the question, “How much Gross Revenues does it take to cover your BNI costs?”
The answer is determined by how much Gross Margin (GM) – a.k.a. PROFIT – you make.
For example, if you are generating a Gross Revenue of $10,000, and your GM is 50%, your Net Revenue (profit after tax) would be $3,350. More than enough to cover your BNI investment.
However, if your GM was only 25%, your Net Revenue would now only be $1,675, which means that BNI doesn’t produce an ROI.
So here are five questions to ponder:
- How much Gross Margin does your business make?
- How much revenue do you need each month to cover your overheads?
- Does every product line your supply generate the same GM?
- How profitable is each line of service?
- When was the last time you spoke to your accountant?
Take the time to ask yourself, “Do I know how much profit I make?”