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What is Profit?

Hamish Pryde • August 6, 2014

Most people say:   "It's what's left over after everything else is paid".

 Let's re-state that definition.  Profit is your goal.  It's what you're aiming for.  It's the very foundation of your business model because without profit, your business isn't going to do very well.  

 Without profit, rarely will your business ever be able to give you what you want.  The first question to ask then is: "How much money do you need every year to live the life you want?"  Assuming you never have to work again, how much do you need to be able to pay all of your bills, cover all of your expenses and do the things you want to do?  Is it $100,000?  $250,000?  $2 million?   Add another 40 percent to your answer and you have the estimated net pre-tax profit figure your business needs to make.

 Once you have that number, estimate a realistic Net Margin that your business could and should generate. Net margin shows how much of each dollar earned by the Company is translated into profits.  Some businesses will only be able to generate a 10% net margin.  Other serviced based business can generate as much as 25% - 30%.  Whatever you estimate, take your profit figure and divide it by the net margin to calculate the gross sales your business will need to generate.

 Let's suppose, for example, you need $100,000 each year to live your life.  If you add 40% to that figure, your profit number is $140,000.  The thinking here is that your business will generate $140,000 in profits, of which $100,000 goes into your pocket.  If you work at the Company, you will also get a salary commensurate with what you would pay someone else to fill that position.  In other words, your $100,000 return is your reward for starting the business and for all the effort, worry, hard work and risk invested.

 Let's also assume that a good net margin for this business is 20%.  In other words, 20% of every dollar of gross sales is net profit.  Following the calculation above, that would mean this business would need to generate $700,000 in sales annually - ($140,000 / 20%).

 You now have the means to calculate your profit goal!

 Once you have a profit goal, you need a strategic plan on how to get there.  This will need more questions answered like:

 

Ø    Who is your ideal customer?  Describe them.

Ø    How often will they buy from you each year?

Ø    How much will they spend on their average purchase?

Ø    How many new clients will you need to generate annually?

Ø    How loyal will they be?

Ø    How many years will they continue to buy from you?

Ø    What products and services will you be selling?

Ø    What geographic areas or markets will you be serving?  

 

Answer these and get your Chartered Accountant and Business Advisor to help, and you are on the right track.

 

By Hamish Pryde September 11, 2024
Paper is everywhere. We spend a lot of time and money moving paperwork around. But with today’s technology it is now possible to get rid of paper entirely. Digital documents are simpler, easier to store and send, more searchable and permanent. How long does it take to post a document to somebody via the ole stamp and envelope method, that is snail mail? It is more efficient and timelier to email the document. How many times do you go to print a document at home and find that your printer has run out of ink? Why do we still hold onto printing paper documents? Sometimes it’s just because that’s what we’ve always done and let’s face it change can be difficult at first. Paper alone is cheap. But when you start paying for printers, toner, servicing and maintenance, paper starts to look more expensive. Let alone the storage cost. Paper tax records for seven years can be quite a few boxes of paper. We have embraced some paperless technology as part of a modern business practice. This includes digital signatures, digital collaboration, paperless minutes of business improvement and coaching meetings, electronic work papers and my new digital notebook which I am enjoying. We send questionnaires via email to you to gather vital information to enable us to prepare your annual financial statements. This is a PDF document. Instead of printing the questionnaires you could save the document down into a folder of your choice then edit the PDF document and return to us. How do you edit a PDF document you ask? Once you have opened the document the Adobe online editor lets you do some things for free. The online editor works in any web browser and lets you add text, sticky notes and highlights. Click on the fill & sign button to the right of the document, then in the top toolbar click Iab text button. You can add text directly on the PDF document. Have a try next time you have a PDF document open. Xero and Farm Focus users can attach invoices directly to the transaction loaded into Xero. Then if you are looking at the rates expense in the profit and loss account or farm working account, you can drill down into the rates code and see the transactions. Then attached to each transaction is the rates invoice if you use this great functionality. All invoices can now be stored in the cloud. So why paperless? Productivity - electronic documents are instantly and simultaneously available to everyone who needs them. Reduce waiting times with less risk of loss or damage. Cost savings - you will save money on printing, postage and associated costs. You could pay less rent because you won’t need all that space for your files. Security - electronic documents are more secure than printed ones. Digital records can be password protected and rendered unreadable through encryption. Printed documents are only as secure as their proximity to a copy machine. Reduced Clutter - paperwork on desks and shelves are not only untidy it’s inefficient too. The organisation of digital files is simpler and your office will look much neater. That will help you clear your mind to focus on your business. Environmentally friendly - less printing means fewer trees cut down for pulp and less energy used to make and transport paper. Disaster recovery - if there is a fire or flood, recovery from the backup is much easier with digital storage them with paper. There are great help articles available in Xero or Farm Focus if you are not attaching invoices to payments already. To find out how click on the links below: If you would like to explore ways you can go paperless we can help.
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