How profitable should your business be?

By October 12, 2016September 7th, 2018Business Planning & Strategy, Performance

PROFITABILITY OF YOUR BUSINESS

Something that crosses the mind of most, if not all, business owners is wondering how profitable should your business be. There’s an old accountant’s adage (I mean the adage is old, not the accountant) about how profitable a company should be. It’s the rule of thirds and it describes how a company’s revenue gets divided up. It says a third should go to direct costs, a third to overheads leaving a third in net profit for the business owner/s.

But this rule is not particularly helpful for owners of creative industry businesses. For a start, most of them can only dream of making 33% net profit. For another thing, the biggest expense for most creative companies is salaries, which can be difficult to divide up meaningfully between direct costs and overheads.

So assuming the old rule of thirds is of little use to creative companies, how can their owners benchmark their performance? Some industries have comprehensive databases of the performance of comparable companies, so as to build up an indicative picture for a whole industry. Not so the creative industries, which by their diverse natures, makes comparison difficult.

I’m in the fortunate position of having seen hundreds of such companies up close. Experience has taught me that profit is elusive for these sort of companies. If a company is making 5% net profit, they are going OK. 10% would put them among the more profitable creative firms, depending on their industry niche. Anything over that is outstanding.

Even then there are a few caveats to consider. For instance, are the owners taking a salary? This can distort that profit percentage in either direction. What’s the trend been like over the medium term? Has there been any unusual events which have impacted the profit result, either positively or negatively?

Businesses that undertake a business health check with Generate get an idea of both their profitability, and how it compares to industry norms. Because we’ve seen so many similar companies, we know what to look for in your accounts. If you’d like to get a sense of how your business is performing – and how to improve it – drop us a line. We’d love to help.