To the untrained eye, it can appear that a business with a line of customers out the door is making a massive profit.
Surely it must be true that healthy sales = healthy profit?
If only it was so...
Business people know, from personal experience, that booming sales doesn't automatically convert into a healthy profit.
Back in 2010 I opened my first restaurant. We have a massive first month of sales, well above my expectations, and I vividly recall driving to see my accountant at the end of the month to do our first P+L review. I was feeling pumped as I speculated on just how big the profit number would be. However, upon walking in to my accountants office and seeing his face I knew something was seriously wrong. He made me a coffee and calmly sat me down to break the news….we made 5% profit. FIVE PERCENT?! Seriously…but sales were huge and we all worked so hard! How could only 5% be left over??
So what went wrong? The core problem was that my labour and COG’s were way over budget meaning that although I sold a lot of food and drinks, I had simply spent too much on the roster and had a food portioning and wastage problem.
This was my first lesson around small business costs and how they can make or break you, regardless of sales. It was a depressing moment but also a important lesson I have never forgotten.
Profit margins are a big challenge for most small business.
So How Much Profit Does the Average Australian Business Make?
The Australian Bureau of Statistics (ABS Dataset number 8155.0 – Australian Industry, 2015-16) paints a scary picture of the reality:
ABS Dataset number 8155.0 – Australian Industry, 2015-16
- The average profit margin across all businesses was 10.9%.
- The bottom three industry sectors with the lowest profit margins in FY16 were Wholesale Trade at 3.4%, Mining at 3.7% and Retail Trade at 4.3%.
- The top three industry sectors with the highest profit margins in FY16 were Rental, Hiring and Real Estate Services at 50.1%, Health Care and Social Assistance (Private) at 27.2% and Professional, Scientific and Technical Services at 22.2%.
- The Mining industry showed the biggest drop in profitability over the past four years, going from a 26.5% profit margin in FY13 down to just 3.7% in FY16.
- The worst-performing industry with the highest percentage of businesses that did not make a profit in FY16 was the Mining sector, at 60.5%.
- The best-performing industry sector with the lowest percentage of businesses that did not make a profit in FY16 was the Transport, Postal and Warehousing sector, at 12.1%.
The most scary fact of all is that 1 IN 5 AUSTRALIAN BUSINESS DON'T MAKE A PROFIT AT ALL!
Given that there are approximately 2.2 million businesses operating in Australia, this means that more than 450,000 Australian businesses didn’t make a profit in FY16!
How Does Your Profit Compare to Industry Averages?
Whilst the statistics above are useful for painting the big picture, the ABS has some great industry benchmark tools you can use to see how your business compares with others in similar industry segments.
Check out the ABS Dataset to do your own comparison.
How Can I Improve the Profit Margin in My Business?
Here are a few tips on how to maximise profit margins in your small business:
1. Cost Management is AS IMPORTANT as Sales.
Seems obvious I know, but there is not point in pushing for more sales unless you are making a decent profit margin.
Often, whilst great to grow your sales, increasing sales through marketing, new product items or sales often means additional costs.
However, reducing expenses by 1%-2% will flow straight through to your bottom line.
So make sure you are a cost focused business owner who understands that cost management is as important as sales growth.
2. Watch Your Big Costs Weekly.
For most businesses, staff and cost of goods sold (referred to as COGS) are their two biggest costs and should be calculated and reviewed weekly. Yes each and every week.
These two items can literally make or break your business. Have them under control and you will see a healthy number on the bottom of your P+L. Fail to watch them like a hawk and you will find yourself having depressing conversations with you accountant at the end of the month.
So how can you best manage staff and COG’s?
COG’s is best managed through a regular stocktake of product in the business as well as tracking discounts and wastage effectively.
Labour costs should be managed using a online staff rostering solution such as RosterElf where you can set budgets and see costs live before publishing which is vital. Most of our clients find they save between 2-3% which can make a massive difference to the bottom line.
3. Do a Full Audit of Smaller Costs Quarterly.
Although your small ticket costs may be tiny in comparison to labour and COGS, they can add up!
A great suggestion is, every quarter, block out a half day and review every small cost item in the business from internet and phone plans, to insurance and training costs to even stationary and printing suppliers. Set a goal each quarter to find 1-2% savings but seeking new quotes and looking at areas that can be cut altogether.
4. Review Your Prices.
Customers are not as sensitive to price increases as we all think and the results can be massive. Every cent in terms of price increase usually flows straight through to profit.
Let's say your a coffee shop who sells on average 2500 coffees a week for $4 each. Increasing that price by $0.20 will result in a profit impact of $26,000 per year! That's huge.
Always look at opportunities to increase prices and keep an eye on what competitors are doing. If your service and product is better than anyone else, most customers will not mind a small increase.
Nothing feels worse than working hard and growing your business, only to find a measly profit number at the end of the month.
Try these tips in your business and you will find your profit and your satisfaction growing.
Cheers to healthy P+L’s!
CEO/Founder @ RosterElf
Magically Simply Staff Rostering