I am often asked how much profit should my business be making. It is a great question and there is no one correct answer to this. However, there are some steps I go through with clients to help them arrive at a relevant answer for them.
The first step is to have a discussion with the business owner around what sort of profit they would like to make. Nearly always they say they work very hard and would like to make more money. The key is to find what level of profits is desired, or in other words, what business investment return they need to make the hours they work and dollars invested worthwhile.
As a general rule, I tend to find that a business which is making a net profit (before paying wages to the owners) of 10% to 15% of sales is doing alright. So if your sales are $1 million, then your profit should be in the range of $100,000 to $150,000. Businesses at 15% or above are doing very well. Less than 10% and you may find the hourly rate you are being paid (profit divided by hours worked) is less than what you desire, and may even be less than working for someone else. But remember this is just in general terms.
The next step is to see if I can find similar businesses to compare the client's business to. For this Kennas have access to Australia wide business benchmark data for many industries, so we can see average industry profitability (as well as a range of other KPI's). This helps to show if your business is performing as well as other businesses in the same industry, and can highlight key areas of difference to be focussed on to improve your businesses performance.
The final step is to demonstrate how small changes can make a big difference to the bottom line. This is all about encouraging the business owner to keep focussed and working hard to find and implement continuous improvement ideas to their business. I tend to find that by Kennas working closely with the business client, having regular meetings and reviewing their business scorecard each meeting (the financial performance), it means the business owner has a much greater chance of success. With Kennas acting as an external mentor and Chief Financial Officer to bounce ideas off and assist with roadblocks, we can help create and keep prioritised business actions, keep owners focussed and motivated, and help guide their business towards creating more sales and profits.
If you would like more information on how Kennas can assist with taking your business to the next level, please call me on 4924 9100.
Darren Smith - Kennas Partner and Business Improvement Specialist