It’s an age-old question that will come up in many business conversations. Why do we do what we do? It’s also a question that has received many different responses, because, who really just wants to say the words… For the profit!
Not many do, and why would they. While it might be partially true, the main reason most of us do what we do is because we’re good at it. Our professions are something we are passionate about and have their place in the DNA of who we are and we’re really proud of that, right? Absolutely.
Only, the reality of business is that the money is just as important as the pride and passion and to some effect, we really do it for the money. A business has to make money and it needs to be profitable.
So, how does it work? What is profit and why is it important?
The profit to your business is the positive financial gain it makes after the deduction of all business-related expenses such as wages or rent and utilities for example.
Your business cannot survive if it doesn’t make a profit. The ability to generate profit is more than just making money. It is the ability to invest the surplus funds to grow your business.
Profit is neither the money reflected in a bank account or cash in the company locker nor is it the same as cash or sales. It is reflected in your statement. You must understand the drivers of profit and the profit margins to be profitable. Then you can go about building strategies to be profitable based on the concept of revenue and sales on one hand and costs on the other.
Profit or Loss
Making a Profit is not rocket science. It can be as simple as buying stock at a price and on selling the same stock at a higher price. The difference is called profit.
Calculating profit can be a tedious task especially if you have a fairly large inventory. Your time and resources are best spent working on your business rather than in it. That’s why it is fairly common for most businesses to outsource accounting help to study the day-to-day costs and revenues. Your accountant will meticulously study the costs associated with all products and services and the revenue generated from them, they will then be able to show you the impact of this has on your profit or loss.
Determining your Profit
There are numerous variables to be studied which will determine the profit of your business, so having a highly regarded accounting professional managing this for you is a sensible decision, for instance, if the balance sheet is not done properly, it is quite likely to show a profit even though there has been loss and vice-versa. It’s a common mistake that business owners who wear many hats will encounter.
Your Accountant is there to help
Using your accountant to get a clear picture of whether and how much profit you are making will also enable them to give you good advice on where and when you can plan on expanding or growing your business.
There are tell-tale signs of profit or loss which your accountant will be able to offer advice around. The liquidity ratio can give you an idea about the health of a business as does net profit margin, cash flow, and several other indicators. So, it really is important to seek that professional advice.
So, how can you make more profit?
There are several ways to make more profit out of your business, and below we share some examples. But it’s so important that you are thinking of things you could do.
- Buy low and sell high. Source your products at the best rate you can find or speak to your current supplier to see what they might be able to do for you. Just remember to stay competitive when add your profit margin.
- Client sharing. This is a proven way to earn profit by sharing client with another business in exchange for a percentage of the profit. If your website generates a lot of traffic, you could offer to partner with a similar (but not a competitor) company for a landing page, guest blog or some content on your site.
- Leadership: If you’re an expert in your industry or field, you can also generate profit from mentoring and consulting. As a business owner, if you want to optimise your profit, you may consider adding a such a service through your company.
- Referrals: The absolute best way to generate revenue from the clients that know and trust your brand. There are several ways to incorporate customer referral programs in your business. You may offer your current customers free or discounted products and services for their referrals. Free or discounted products/services can also be given to land a first-time customers or client who has potential to be a lifetime customer.
There are of course more innovative ways that are only limited by your imagination and because you know how your business functions and may already have an idea or two that you’d like to try.
So, the important point for businesses is to get your pricing right in a competitive market. It’s here you can lean on the expertise of your business accountant to offer good advice and help you find the best position for your pricing.
Ainsworth Accounting Solutions are here to help you with any of your business accounting needs and we’d be happy to speak with you. Simply contact us today to take the next step!