As a business owner, reviewing profitability quarterly should be high on your priority list. Business environments change rapidly and require regular attention.
Before you can measure profits, you must first define your goals. You need something to measure your profits against to determine where you need to improve.
Getting Started
Take a few minutes to define your idea of success and profitability. Prepare a report of income and expenses using your accounting system’s profit-and-loss (P&L) report comparing multiple months side by side.
Develop goals for the next 12 months for each of the following:
- Top line total revenue
- Recurring revenue, including SaaS subscriptions
- Gross profit margin
- Total overhead expenses
- Net operating profit
Next Steps
With goals in place, here are some tips to measure and manage your business profits:
- Keep your accounting system up to date and easy to read. For every revenue account, you should have a matching cost of goods sold (COGS) account. Review your income statement (P&L) monthly. Revenue accounts should always be higher than its matching COGS account. If they are not, investigate and correct.
- Once your accounting system is correct, review your Gross Profit Margin. A profitable company will have a gross profit margin of 40% or higher, including direct labor.
- Overall labor should be somewhere in the 33% – 37% of total revenue.
- For each employee, your company should see a minimum of $200,000 in revenue. If you have 10 employees, your top line revenue should be very close to $2 Million. If it is not, determine how much revenue each employee is responsible for.
- Prepare a Labor Efficiency Assessment. For direct labor: Gross margin before direct labor, divided by total direct labor should equal or exceed direct labor multiplied by four. For management efficiency: Gross margin after direct labor, divided by total management salaries should equal or exceed management salaries multiplied by four.
Rayanne Buchianico
- Keep overhead expenses fixed at 25-30% of total revenue. However, if your gross margins are low, then you will need to reduce your fixed expenses to compensate for the reduction in profits.
Be sure to review your P&L with percentage of income comparisons. A healthy company may have a P&L that looks like this when looking at percentages only:
- Total revenue: 100%
- Less cost of goods sold: 55%
- Gross profit margin: 45%
- Less total expenses: 27%
- Total operating profit: 18%
- Other expenses: 3%
- Company net profit: 15%
The minimum net profit should be 10%. If your company is making a profit of less than 10%, make changes right away. Those changes do not always include more customers. If your gross margins are misaligned, more customers will exacerbate the problem, not solve it.
If your profits are not where you want them, follow the steps in this article.
Rayanne Buchianico is CEO of ABC Solutions LLC, a full-service accounting and tax firm since 2005 specializing in technology firms. She is a shareholder in PSA Impact Inc., helping MSPs make the most of their PSA system by optimizing their systems for efficiency and automation. Get to know more about Buchianico at channelWise.
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