Series 2: Maximising Your Profit

by Phil Latz

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Hi, welcome to the third blog in my finance series that I hope will help you become more successful in your business.

As a business owner myself for many years, I understand the challenges that you face.

The theme of this finance series is how to maximise your profit.

There’s an old saying, “Turnover is vanity, profit is sanity and cash is king!”

We’ll get to the cash part of the equation in my next blog, but today I’ll be exploring the difference between turnover and profit, explaining which is more important and why.

When you ask many business owners how their business is going, they’ll immediately start talking about sales. 

‘Business is good! Sales are up this month!’

But just because you’re making sales, or turnover, doesn’t mean that you’re making a profit.

Sales may be easy to measure and may even be an indicator of profitability, but you can only be sure about that if you have a good idea of both your costs and expenses.

Let me define these two terms more precisely.

Suppose your business sells purple widgets for $10 that cost you $7 each to buy. That means that the first 70% of your sales isn’t even your money to keep. It needs to go straight to your supplier.

The purchase of those widgets is called your costs, or sometimes your costs of goods sold, or COGS for short.

Sales, less your cost of goods equals your gross profit, which in this case is $3 per widget.

Then you need to pay your expenses which some people all overheads or fixed costs.

These include your rent, phone, power, wages, travel… it’s usually a long list. Suppose that you sell 1,000 purple widgets each month and your expenses are $2,500 per month.

Dividing $2,500 by 1,000 reveals that your expenses equate to $2.50 for each widget that you sell.

Three dollars gross profit, less $2.50 means there’s only the 50 cents left over that is your net profit, and that’s before tax!

It the tax office takes 30%, or 15 cents, then you’re left with just 35 cents of that $10 sale that is truly yours to spend however you like.

In this example that means a 5% net profit before tax and a 3.5% net profit after tax.

That sounds like a tiny share for all your hard work and risked capital, and it is! But there are plenty of businesses running at this rate of profit or less.

Yet as the owner of a business, it’s only your net profit after tax that’s truly yours to spend on whatever you like. If you don’t agree with this statement then try not paying your suppliers or your phone bill or the tax office for the next year and see what happens!

Net profit margins vary greatly between industries, but for most small businesses, you should be aiming for a minimum of 10% net profit before tax. In many sectors, such as software and service based businesses, property development and others, you should be aiming for at least 20%.

Depending upon your industry, you can probably find benchmarking, either via the Australian Taxation Office, or your industry association, to give you an idea of what profits your competitors are typically making.

I’ve seen examples of similar sized businesses in the same industry, in the same city, where one is making 1% profit and another close to 20%.

Why is that? 

The more profitable business measures its performance carefully. 

What gets measured gets improved!

They find out the numbers that matter in their business and check them regularly.

For example, if you’re in a professional services industry, such as accountants, lawyers, graphic artists, repair shops and a host of others that charge for their time, here are two key measures.

The first will be the percentage of paid hours each employee works that can be billed to a client. This is known as billable hours.

Another measure will be the hourly cost of each employee as a percentage of their hourly charge out rate.

Meanwhile the owner of the less profitable business probably spends too much time measuring his sales (vanity) rather than working out the more important number, net profit (sanity).

Which business owner are you? 

Don’t worry, it’s never too late to change!

I hope this blog has helped you to shift your perspective from turnover to profit!

In my next blog I’ll look at the final part of the old saying, cash is king!

I believe that with passion, consistent effort and wise advice you can succeed in your business.

I wish you all the best and I’ll see you next time.

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By Phil Latz

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Hi, welcome to the second blog in my finance series that I hope will help you become more successful in your business.

As a business owner myself for many years, I understand the challenges that you face.

Today I’ll be diving into financial statements in all their numerical glory.

I am not planning to give you a training course in book-keeping or accounting methods, or go into too much detail about these topics.

There are plenty of good software packages out there and plenty of specific training courses available.

As the business owner, you don’t need to do the books yourself, or even understand the finer details. But it’s vital that you understand the basics, so that’s what I’ll be covering today. More importantly, you need to not just understand the basics of financial statements, but to take the time to review them and then take action based upon that information.

This last step is both the most important and the most neglected by small business owners.

Imagine that you’ve just paid to go to a major sporting event, say a game of football. You walk inside the stadium and there’s no scoreboard. You can’t find the scores online either. No-one is even keeping score. The teams are just playing for the regulation time and then walking off.

How boring would that be for the spectators? And how de-motivating for the players?

Financial statements are the scoreboard of business. 

The scores are measured, not by runs, goals or points, but by dollars.

Without accurate, timely financial statements, you can’t tell if you’re winning or losing and that’s vitally important information. 

In sport, if you lose, you can just lick your wounds, cop a spray from the coach and front up for the next game.

But the discipline of business is bankruptcy. There are no safety nets or consolation finals.

Just as sports competitions have stages and strategies, there are three critical stages relating to financial statements.

Stage one is collecting data and using it to create your financial statements. 

May have heard of the expression ‘garbage in, garbage out’.

The data that goes into your financial statements needs to be as accurate as possible. 

Unless your business is at the small start-up phase, or you genuinely love doing the books and are very good at doing them, then I’d strongly recommend that you staff or contract out your bookkeeping.

Stage two is reading the data.

You can delegate 100% of the financial statements’ preparation, but you must learn to read them yourself.

To properly read and comprehend anything, you first need to learn how to read. I’m going to run through the briefest summaries in a moment, but for everything else, please get help.

It’s not enough just to know how to read and understand financial statements. You must read and review them regularly. I would suggest that for most businesses, monthly is ideal. Certainly at least quarterly.

I know that many small business owners only take a cursory look at their financials once a year after their accountant prepares their annual tax returns. Often this is six months or even more after the end of the financial year.

That’s like driving a car with your eyes closed, apart from glancing into your rear view mirror once every block. You won’t even know what hit you when you crash, because you won’t have seen it coming.

Now we’ll run through some key things you need to understand about using financial statements.

There are two main components of any set of financial statements, the Profit and Loss Statement and the Balance Sheet.

Your Profit and Loss, often called the P&L for short, shows you how you’ve gone for a particular period of time. 

Often this is for a financial year, which in Australia runs from 1^st July to 30^th June, but is different in other countries such as the USA and New Zealand.

It’s a good idea to have your book-keeper add extra columns to your P&L. I like to see four columns: current period (be it a financial year, quarter, month or whatever period you’re looking at), and comparison to the same period last year.

Then two columns of percentages, one for the current period and the other for the previous period.

P&L’s start with sales revenue at the top, sometimes called turnover. 

Then they deduct the cost of sales, sometimes called cost of goods sold or COGS.

This gives you your Gross profit.

Then they deduct expenses, sometimes called overheads

This gives you your net profit, which is literally the bottom line, upon which that widely used expression is based, ‘What’s the bottom line?’

Sometimes people have trouble understanding the difference between Cost of Goods Sold and Expenses, and where to allocate various payments.

A simple way to think of it is this: your expenses are relatively fixed. If you don’t sell anything today you still have to pay your rent, electricity, insurance and so on, so they’re all expenses.

But your cost of goods directly relate to the amount of stock you need to buy and other direct costs of sales, which should be closely linked to your sales. That’s why they’re also called ‘variables’.

Moving onto the Balance Sheet, unlike the P&L which is for a certain period of time, the Balance Sheet is always as at a certain date.

In Australia that typically means the last day of the financial year, 30^th June.

The Balance Sheet also has a standard format:

At the top your assets are listed. Assets are usually broken up into current assets (such as cash) and non-current or fixed assets, such as property.

Next your liabilities are listed.

Finally your liabilities are deducted from your assets to give the bottom line, which is this case is called Equity, or sometimes called ‘Owner’s Equity’.

Your owner’s equity, which can sometimes be a negative number, plus your liabilities, should equal your assets. In other words, they balance, which is why it’s called a balance sheet.

Your Balance Sheet links to your P&L. 

Here’s how. Suppose your balance sheet as at 30^th June 2019 shows equity of $100. 

For the financial year 2019/20 you then show a net profit of $10.

Then your balance sheet as at 30^th June 2020 should now show equity of $110 being the original $100, plus the 10 dollar profit from the year of trading.

If you made a $10 loss then the equity go down to $90.

Of course this is a very simplified example, but it illustrates the link.

Finally, Stage three is making decisions and taking action based upon what your financial statements are telling you.

This is using your financials as a business management tool.

That’s what the smart, successful businesses do. Why don’t you join them?

Here’s a tip for free that consultants will charge you a fortune to do. It’s one of the quickest and easiest ways to grow your net profit.

Suppose you’re running at 5% net profit. If you can save a dollar from any expense, it will go straight to your bottom line. In other words, every dollar you save in expenses will be a dollar more on your net profit figure. 

But to get the same impact on your net profit by increasing sales, you’d have to sell $20 more, because $20 x 5% net profit rate equals $1.

So take a good close look at your expenses. Put a ring around the biggest ones, say the top five or 10, depending upon the size of your business and length of the list. If you have the % column switched on in your financials software, it will make it easier to pick them out.

Then consider each of these one by one. How long have you been with the same supplier on the same deal? 

How long since you’ve put each one out to tender? In other words, sought at least three competitive prices for that product or service?

If your answer is ‘Never’ or ‘Not for years’, then take action now! This is classic quadrant two work, it’s not urgent but it’s important! If you don’t know what I’m referring to, then please go back to video six from my first series about the four quadrants.

It’s worth repeating, every dollar you save will go straight to the bottom line. Going back to our example business that’s making a 5% profit, if they can save $10,000 that has the same bottom line effect as selling an extra $200,000 worth of products, with a lot less time, effort and headaches to go with it.

This is just one example of how you can use your financial statements as a tool to take positive action and improve your business. I could give you many more, but for now, we’ve run out of time.

In my next blog in this series I’m going to help you see the difference between turnover and profit and why the second of these two is so much more important to your business.

I believe that with passion, consistent effort and wise advice you can succeed in your business.

I wish you all the best and I’ll see you next time.

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by Phil Latz

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Hi, welcome to the first blog in my finance series that I hope will help you become more successful in your business.

As a business owner myself for many years, I understand the challenges that you face.

Today I’ll be giving you an overview to series two, which is all about maximising your profit.

At last! You might be thinking if you worked through my first series on Personal Growth. Now you’re finally getting into the useful information!

Well… no. If you haven’t worked through my first series, I would recommend that you go back and start there first.

Sure, this new series on Maximising Your Profit contains a lot of useful knowledge. But if you only have knowledge, without the wisdom to apply it appropriately, you keep running up against the same limits. The first series is about wisdom. That’s why I put it first.

So let’s get started on the journey to maximising your profit. Let’s lay some ground rules. Maximising profit is nothing to be ashamed about! 

I did not name this series Maximising Your Profit, just as a clickbait strategy.

I’ll never forget the day my favourite teacher, in my favourite subject at high school, said something simple but profound. You won’t be surprised to learn that the subject was economics.

The teacher’s name was Laurie Dennis. He liked a bit of fun and theatricality to make a point.

He started by going around the class and asking everyone, ‘What is the aim of a business?’ He then patiently listened to several minutes of idealistic answers about producing quality products and services, serving customers, providing jobs and whatever else a bunch of teenagers could think of.

After everyone had given their opinion, he stood front and centre and stated forcefully, “The aim of a business is to maximise profit! Full stop! 

“If it does not earn a sustainable profit, it won’t stay in business and none of the lovely other things you lot have all talked about will happen anyway!”

You can argue all you like about Silicon Valley start-ups where it seems to be all about growth and market share. And sure, the Americans in particular seem obsessed with growth. But even there, for every company there comes a day of reckoning. 

Sooner or later investors run out of patience. In business it’s profit or death.

So how do you maximise your profit? Before we even start to look at your product, marketing, staff and a host of other factors, we need to build a strong financial foundation.

You might find financial statements, spreadsheets, numbers and accounting boring.

I don’t care!

I’ve yet to meet a truly successful businessperson who at the doesn’t have a good feel for the numbers that drive their business. Even if there’s room for improvement in how they measure, record and use those numbers.

In this series we’re going to start with understanding the basics of financial statements, then move on to key performance indicators.

Then I’ll explain some of my favourite business sayings including: ‘Turnover is vanity, profit is sanity and cash is king.’ And.. ‘What gets measured gets improved.’

Next we’ll look at how to put your profit first, followed by five ways to increase your profitability.

Then we’ll dig into a huge profit killer, discounting and the true cost of discounting.

We’ll round of the series with six steps to massive results, how to begin with the end in mind and finally, understanding how to make debt your servant and not your master.

I hope that this blog has given you some useful insights into business and profit.

In the next two blogs in this series I’m going to dive into the scintillating world of financial statements!

I believe that with passion, consistent effort and wise advice you can succeed in your business.

I wish you all the best and I’ll see you next time.

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