“How much profit should I make?”
When you run a business it is important to make a profit.
This shows that you are making some sales, you are covering your costs and you have profit left over.
But we often get asked about the amount of profit, whether or not there is a certain level of profit that needs to be achieved.
As a client said the other day, “I made a profit of $50,000, is that any good?”
Well, that depends on how you look at it. There are a number different angles to assess your profit.
Profit as % of Turnover
How does it look as a % of Turnover?
If your profit of $50,000 is on a turnover of $100,000, then it’s 50%. Very high. But if your turnover is $1,000,000, it’s only 5%. Not as good.
Return on Investment
How does it look as Return on Investment? (ROI)
If you’re investment was $500,000, then your ROI was 10.0%. Compare that against other ROI’s in the market to see how your return stacked up.
Return on Assets
How does it look as a Return on Assets? (ROA)
This is a measure of how efficiently you are using your assets. If you have $250,000 of Assets, your ROA is 20%. You could then compare your ROA against others in your industry (benchmark) to see how you’re performing relative to others.
Owner’s Wages
Did that profit include any wages to you?
This is an important one. If it did not include any wages to you, then it’s not a real profit. Profit should be shown after payment to you for the work you do. Otherwise, you’re not getting paid for your efforts.
Timeframe
How long did it take?
Time is also a factor. Making $50,000 in 6 months is significantly different to 12 months. It’s best to look at a full year.
And check for seasonality. It might just be the busy season. You might still need to ride out the quiet patch.
Accountants don't mean to rain on your parade. (If you're happy with $50,000 profit, that's great!) We just like to see numbers in context to get a better understanding of how they fit together.
If you wonder how your profit stacks up, feel free to get in touch.
Peter
