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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:

  1. How much Gross Margin does your business make?
  2. How much revenue do you need each month to cover your overheads?
  3. Does every product line your supply generate the same GM?
  4. How profitable is each line of service?
  5. When was the last time you spoke to your accountant?

Take the time to ask yourself, “Do I know how much profit I make?”

Nsanz GSF