Are You Watching Your Bottom Line?
By Drue Lawlor, FASID
Director of Coaching at Gail Doby Coaching & Consulting
There are numerous terms used in business, but one of the most important to fully understand and consistently watch is your “bottom line”. Just as a reminder, your bottom line refers to the profitability of your business after all expenses have been deducted from your revenues. So bottom line profits are net profits after all the costs of your business have been met – including your pay as the owner of the business.
According to BizMiner, 9.4% net profit is standard for over 15K firms in the US. Where does your business stand? Some professions average between 16%-18% but at Gail Doby we encourage you to aim for between 25%. Yes you will pay taxes on this but you should be planning to put some of your Net Profit dollars into retirement accounts and this will reduce your overall taxes.
Many business owners look to their bank accounts or the amount of sales to judge how well they are doing – but that can be extremely misleading as those numbers may be very high. Without considering your cost of doing business (expenses) you may find yourself with a business that looks successful from the outside, but is not profitable. Your bottom line, or net profit, will give you a truly accurate view of your business success.
Remember that you don’t want to just pick a number out of a hat for how much profit your business generates. Start with your desired annual income, yes, but don’t forget to include your retirement savings goal, when you plan to retire, and how much money you need to save to meet that goal. That will then be additional income – net profit – you will need to generate beyond your monthly salary, draw and expenses. Also don’t forget to create a reserve fund for unexpected challenges that may come up in your business or personal life.
Be sure you are taking your total revenue, subtracting your COGS (Cost of Goods Sold) which will give you your gross profit. Then you want to subtract your overhead to see what your net profit is. Then take that net profit and divide by your total revenue – this will give you your net profit margin.
If your net profit margin is lower than the 25% we recommend, take a serious look at your overhead. Where is the money going in your business? If your numbers are not where they should be then you need to seriously consider a more profitable business model. Be sure you understand and regularly review your financial dashboard so you can see where your money is going and take control of your expenses.
Remember it’s not always the big expenses that are the problem. To quote Benjamin Franklin: “Beware of little expenses, a small leak will sink a great ship.” So take control of and truly become the CEO of your business