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Margins
This is an important indicator to
profitability. The next time you get
your accounts, take the direct costs of
sales or direct expenses out from the
revenue. Then divide that number by the
revenue. That is your gross profit margin.
Using simple number for clarity let’s
assume your revenue is £1,000 and your
materials/direct labour/direct expenses
cost you £700. The difference of £300
divided by £1,000 revenue gives you a
margin of 30%. This means that for every
£1 of sale, you are making 30p in gross
profit. This tells you how profitable you
are at the gross margin level. You can
also compare this 30% to the industry
average to gauge where you are at.
If this margin is so low, then you’re
unlikely to be making net profit because
there won’t be enough to cover your
overheads.
Wrong Calculation of Price
Having ascertained your profit margins
of 30%. You take your costs. Let’s say 100.
What do you do? You apply 30% to the
costs. You then decide to charge £130.
It makes sense, right? Well not quite. If
you take your £100 costs from the £130
revenue (price) you get £30. Now divide
that by £130. You now get 23%. You’ve
just lost 7% profit margin without a blink.
This mistake will impact your net profit
figure and you’ll be less profitable year on
year.
Not taking profits first
In his book Profit First, Mike Michalowicz
makes a compelling case for opening
another bank account and transferring
your profits before you make payments
to anyone. So, if you’ve worked out
that your net profit on every sale is 10%,
then a safe way to see and secure those
profits is to transfer it straight away to
your “profit bank account”. That way
you are forced to make do with the
remaining 90%.
Staff Costs
If you have staff, a common profit
mistake is not measuring revenue per
staff or profit per staff. This is simply
taking the revenue or profits per year
and dividing it by the number of staff.
Let’s assume your income is £100,000
and you have five employees. Your
revenue per staff is £20,000. Now
compare that to the average cost per
staff. This simple exercise will help focus
your mind on what needs to be done to
increase your profit.
Inefficiencies
Where staff profitability ratios such as
the ones above are low, another mistake
is to focus mainly on staff rather than
both staff and process efficiencies. Dr W
Robert Deming once famously said, “85%