We get asked quite a lot ‘what profit should I be making?’ or ‘am I making enough profit?’. Of course, the answer is it depends on a number of things; the maturity of the business, the industry and the needs of the business owner.
But there has always been a rule of thumb, a magic level that separates the best, and it’s been that level since I started in the profession.
Before we reveal the number it’s worth covering where net profit comes from in a business.
The idea is that you provide a service or manufacture a product and you sell it to someone for more than it cost to make or provide. That is your gross profit. You then use your gross profit to pay your overheads and generate a net profit. The trick is to make sure your sales and therefore your gross profit are high enough to cover your fixed costs and leave something for the business owners.
We look at it like this. The overheads are the costs that support the selling and provision of the services or goods. Don’t sell your own time short though, you need to take account of the work that you do in the business before calculating net profit [even if for tax purposes you don’t pay yourself a ‘salary’]. If you’re running a decent business then your full-time cost should be considered to be something like £60,000 per year per principal.
So if you work out your net profit after deducting the owner’s deemed cost and divide this into your turnover then that is your net profit percentage.
We reckon that anything over 20% is good, 30% is great. If you’re below that it’s not a disaster but there’s probably room for improvement, or you may be in a high growth period [in which case all bets are off].
Things to look at are:
- Are my overheads too high?
- What is my break-even sales level?
- Can I improve efficiency?
- Am I selling too cheaply?
We’re happy to speak to you if you need any help.
