Basing your business decisions around your key profit numbers
Knowing the true health of your business is crucial if you’re looking to make any big decisions about the future growth of your company.
Is your business currently on life support? Or are you thriving and meeting your profit targets? We’ve already talked about measuring your acceptable level of profit (ALP) and how you need to set a minimum level of profit for your business.
And this ALP can be a critical element when you’re scenario planning and asking the ‘What if…?’ questions about the future success of the company.
Knowing your minimum acceptable level of profit
Keeping on top of your profitability is a fundamental part of keeping your business on track and meeting its goals.
You need to agree on your minimum profit level, measure your profit numbers over time and see where you stand as far as your percentages go. Are you achieving that minimum acceptable level? And where is your business on the scale of success?
– there’s no money in the bank and you’re about to flatline.
– you’re covering your costs, but not making the profit you want.
– you’re meeting your profit target and seeing growth.
Wherever you fall on the scale, there are ways to improve. But you need to have a focus on profit improvement at the center of the business to truly achieve greatness.
Feed your ALP into your decision-making
Pinning down your ALP doesn’t just give you a profit target to aim for. It also gives you an incredibly useful variable that can be plugged into your forecasting and decision-making processes.
Whenever you’re going to make a business decision, you can plug the numbers into your decision-making model and see what the effect will be on your acceptable level of profit (ALP) before you make your final decision.
And that’s an exceptionally powerful tool to have at your disposal when you’re about to make a big purchase, enter into a business deal, or make a decision that affects the long-term outlook for the company.
Always make your business decisions once you’ve looked at the potential impact on your ALP – only then can you make an informed decision
– maybe you’re looking to move to bigger offices and want to know how the increased rent will impact on your ALP.
Increase the size of your team
– perhaps you need more people to help you handle your workload and want to calculate the effect of your increased payroll costs on profits.
Buying a company car or truck for the business
– you could be looking to invest in a car, or a bigger truck, to help you become more efficient, and want to know how this outlay could eat into your profit.
Whatever the next step is for your company, your ALP will be a critical element to consider – and when you know the potential outcomes it allows you to pivot, evolve and rethink your plans to preserve those precious profits.
Invest your profits back into the business
Typically, a business will end up at the close of the year with a certain amount of profit – let’s say $50,000 of profit, as a rough example.
And the typical mindset at this point is very much around how you can reduce the tax you pay on this $50k – the owner will be thinking ‘What can I do to get this profit number down and pay less in tax?’.
But that’s a fundamental misconception that many business owners hold. What you need to do is not look at ways to reduce that profit number, but ways to reinvest your profits back into the business.
How does that work in practice?
The answer is to look at the needs of the business, and to use your profits to secure long-term value, rather than a short-term cash distribution to yourself.
Invest in your assets
– if you do need a bigger truck to speed up deliveries for your business, reinvest your profit into buying this vehicle and keep the capital in the business by investing in your assets (the truck).
Clear your debts
– rather than paying yourself a big sum from your annual distributions, why not pay down the outstanding debts that are in the business.
The possibilities are endless, and will be driven by the needs of your particular company. But the key is to do something with these profits that’s going to benefit the long-term success of the business, not just to reduce that tax bill.
Listen to the angel on your shoulder
Successful decision-making is about using the information you have at your fingertips and reaching an outcome that’s informed, long-term and – crucially – maintains your minimum level of acceptable profit.
It’s about ignoring the emotional, greedy devil on your shoulder and listening to the practical, forward-thinking angel who’s sitting on the other arm. Look at the numbers, use your head and make decisions that will help you thrive in the long run.
If you want to know more about controlling your profit levels and making great decisions for your business, come and talk to us. We’d love to help you improve your profits and help you grow.