Did you start your business to be successful?

Of course you did because no one starts something with the intention of failing.

So when you started your business did you think that you would become a most profitable business?

Of course you did because that is one of the primary measures for being successful.

So what happens when you get into the business?

Suddenly TAX becomes a major consideration in running your business. As business owners we have a dislike of paying TAX and this can become such an obsession that it jeopardizes you becoming a most profitable business.

So how does this happen?

It’s simple really. You instruct your accountant to prepare your books so you pay as little TAX as possible. While this makes sense from a cash flow perspective, it can lead to some really strange behaviour around tax time.

Have you ever made purchases because it made sense from a TAX point of view?

Have you ever pushed through expenses so that your profit was decreased and you got a tax advantage from doing so?

Each time you do this you jeopardize becoming a most profitable business.

So why do it?

Well it makes no sense to me at all. Most business owners want to grow their business and if they make no profit and pay no TAX the only way to fund that growth is through DEBT.

Many small business owners have far too much debt because they never think about what they building in the financial part of their business and continually fall into the trap of trying to minimise their profit for tax purposes.

So can I encourage you to make up your mind NOW that you really want to have a most profitable business.

This will mean paying some tax but at the end of the day your profit will provide the fuel to grow your business and you won’t need to keep taking on more and more debt.

What’s your experience on this?

How can you be sure that your business is making the right profit AND that the profit in the books is correct?

Most business owners take a quick glance at their profit and loss account and if the number is positive they get back to running the operations assuming that all is well.

But to have a most profitable business over the long haul you must ensure the following three errors are not evident in your books.

Error 1:
Paying yourself a drawing from the profits and not a wage.

Many business owners fail to pay themselves a wage for tax and cash flow reasons. They only take enough drawings from the profit to keep them alive.

So why is this an error? Isn’t this good tax planning?

The answer is NO because by failing to pay yourself a wage, you’re building the wrong cost base in your business and failing to engage your customers at prices which allow you to make a wage AND a sustainable profit

Error 2:
Failing to account for Inventory.

This normally results from your book keeper coding all your creditors invoices straight to Cost of Sales in the profit and loss account.

This means your sales and costs may end up in different periods with your profits rising and falling haphazardly depending on the timing of sales and costs.

Unless you are able to match these correctly you will have no idea whether your profit is real and sustainable.

Error 3:
Failing to account correctly for Depreciation.

Many small business owners never put depreciation through their books and use depreciation as a method of reducing their profit so they don’t pay as much tax.

So what’s wrong with that?

It means that you never recover this amount from your customer and when machinery wears out you have no money to replace it because you forgot to get the customer to pay for the machinery that their products and services were produced from.

Are these errors which have been in your books?

Are you looking to be the most profitable business in your industry?

Is it important to you whether make a decent profit or not?

If the answer to either of these questions is NO then can I suggest you stop reading right now because what I’m going to say in this blog post will have no relevance to you and you may want to do something more important.

Measuring profit in a business is a key element in making sure that when you do business with your customers you’re doing that in a sustainable way.

Many business owners fail to build a most profitable business while still bringing value to their customers and satisfying the needs of those customers.

This leads to failure in the long haul because there is insufficient profit in the transaction for them to remain viable.

As a business owner you will have at least three forces at you every day with regard to making a profit.

On the day you do your tax return you want the profit to be low so you pay little or no tax

On the day you tell your partner about your business you want the profit to be really high so they’ll believe you’re successful

On the day you want to borrow money from the bank you want the profit to be really high so they’ll lend you the money

Now which of these times do you make sure that the numbers are really right. You may say all the time but the profits of a company come under the most scrutiny regarding profit when you’re doing your tax because if you get that wrong you have to reach into your pocket and find money to pay the tax man and I rarely meet small business owners who enjoy doing that.

This means that often subconsciously the business owner doesn’t want to make profit or more likely subconsciously believes that profit is only a number which is manipulated and has little to do with measuring real success.

So they don’t place a high value of the book keeping in their business.

Now if you’re not one of those and really want to have a most profitable business then there are five components that you need to consider:

1. Sales Price
If you sell your products or services at a price that is too low then you’ll never make a profit. The only issue for you is convincing your customer of the value that’s in that price but you must do this in order to achieve good profitability

2. Sales Volume
It’s one thing to convince the close people around you that you’re selling them good value but in order to have good profitability you must convince at least a niche number of customers you’re providing good value or you simply won’t have enough customers to achieve good profitability

3. Costs to service customers
When you try and service customers you will need to spend money to do that. I like to call this ‘interaction costs with customers’ and it includes the costs of your products, people, marketing and distribution.

If these costs are too high then you won’t achieve good profitability. Sometimes customers fail to realise the costs associated in what they’re asking for and as business owners we can over deliver and under price which only gives the customer a better deal and leaves us out of pocket!

4. Margin
You may have heard the term Gross Margin or simply Margin. When you hear this it is important to know how it is calculated because you can get very different answers depending on what you include in margin.

In our business we use a term ‘contribution margin’ which includes ALL the costs required to interact with our customers. You can read about those above but we have found that we must achieve a 20% contribution margin or else our business struggles. And this MUST include ALL the costs of the business owner as well!

5. Expenses
Expenses in a business make all the difference between making a loss or a profit. If you took all your income and subtracted all your expenses then you’d have a profit (or loss!).

Minimising your expenses will ensure that you end up with a most profitable business but it is important to realise that sometimes in reducing expenses you can damage your business.

If you have an expense such as advertising which will bring in more customers and compare that to rent which won’t necessarily bring in more customers then you need to distinguish between them or you might make a mistake.

We like to make this distinction by calling some of our expenses ‘costs for interacting with customers’ and include those costs in our margin and ‘infrastructure expenses’ which we include after the margin.

This helps us think about the type of expense as well as how big it is.

In developing a most profitable business you will need to consider these five factors as they make up the different pieces for achieving high profitability.

How do you make up your profit and loss account and measure whether you’re successful?

Every day I meet business owners who wish they had the most profitable business in the world but they fail to even get past the first base in achieving that.

So what’s the best way to move towards developing a most profitable business?

To help us in this pursuit let’s use some wise thoughts from Seth Godin who wrote a very famous book called Purple Cow.

In this book he said that to really be successful you had to be the best in YOUR world at what you do.

He did not say you had to be the best in THE world.

He said you had to be the best in YOUR world
and then he went on to say DEFINE YOUR WORLD.

So the first step in developing a most profitable business is to work out what type of customer you are targeting which is another way of defining your world.

When many people go into business they fall into it in a very haphazard way which lacks any real focus. They try and sell everything to everybody and wonder why they never make any really good money.

If this has been your experience make a promise to yourself that you’re going to stop what you’re doing and DEFINE YOUR WORLD.

And remember this is a world where you are the absolute best at what you do. No longer can you be mediocre or nearly as good as others. This is a world where you are the standout business that everyone recognises and loves.

So if you’re struggling as an international business you might become a national business. And if you’re struggling as a national business you might define your world as being a regional business. This will allow you to focus on being the absolute best at what you do in a smaller market.

Once you have defined your world then the next step is to start asking questions of your best customers. This may be quite an ordeal for you because you may not like the feedback. It may not all be positive but your best value will be when your best customers can be 100% truthful in their feedback.

It really won’t help you if your customers tell you what you want to hear. If they have issues then it’s best for you to hear them because they at least have valued you enough to part with money and become a customer.

So ask these questions and then listen as best you can to the answers.

• What do they like about your business?
• What do they dislike about your business?
• How could you improve in the future?
• Would they recommend your business to others?
• If they wouldn’t recommend your business then what would you have to do to get them to change their mind?

Now you may be asking yourself how this all relates to having a most profitable business.

A key element of profitability is Income. Without this, it is obviously very difficult to make a profit. The greatest source of income is from loyal customers who buy from you over and over again. This repeatable income stream will allow you to develop a successful business which brings you the greatest profitability.