How much profit should you be making?

As a chartered accountant by trade, I do love my numbers!

Not only do they provide clarity in a business, but also they give you some real, firm, quantifiable targets. I find numbers never lie, and they are the first place I start with all of my work with new clients – show me your P and L and balance sheet.

So what sort of profit should you expect to be making?

Should it be a number that ensures you have enough to cover your expenses and that of your families, with some left over for holidays and good times?

Or should a business owner expect to be making enough profit to achieve that past stereotypical kiwi dream of the 3 B’s (BMW, bach and boat), or whatever it is you dream of owning.

Too many people are not making enough in owning and running their own business. They literally earn what they might be able to earn in a job, and quite often less.

With owning a business they take on more stress, yet what they receive return wise is often not commensurate to this stress, and the risk that they take on.

I know that there will be some people who will disagree with my numbers but this is my summary as to what you want to be making if you own a business.

A good business with a medium to high gross profit percentage should aim to make over 20 per cent of sales as profit – and I am talking profit after you as the business owner has taken a reasonable wage.

Let’s put it into grades. I see it that 0 per cent to 10 per cent profit – as percentage of sales – is like a C grade at best. This will be  D or E if it’s anywhere near the 0 per cent mark or worse (as in a loss).

If you’re making 10 per cent to 15 per cent, that’s about a B grade.

Fifteen to 20 per cent is getting better – that’s more like a B+ to A-.

I like it when we start talking 20 per cent to 25 per cent. To me that’s an A grade.

Anything over 25 per cent would be like an A+ . Above 30 per cent is totally outstanding.

If you operate with a low gross profit eg. in a price-commoditised industry, then it is often better to look at your profit percentage over GP instead of over sales.

In that case, the above numbers would be similar as far as what you want to aim for, albeit a probably slightly higher percentage.. So in an extremely low margin product environment, if you were making say more than 30 per cent of your GP dollars as profit, then I would say “well done, that is A+ or better”!

Of course there are extremes and some companies can make 30 to 50 percent+ profit, but that does not happen overnight or very often.

One tip for the “uber high profit  percentage” business owners out there is that sometimes making such a high profit percentage can not be such a good thing, as it might indicate that you are not investing in R and D as much as you should.

Of course start-ups take a while to get to the above levels. Most start-ups tend to lose money in the first year. If you make a profit after paying yourself a wage in your first year, then you will not be far off the top of the class.

For help on how to increase your profit percentage grades or your profits as a whole, talk to Zac to get some business coaching Auckland. His long-term customers achieved 112% increase in profitability in the last financial year. zac@businesschanging.com