Some time after the end of each financial year, we all receive a package of bound figures from our Accountant. As well as telling us how much tax we have to pay and including vast depreciation schedules, it will also tell us whether or not we made a profit in the last year. Hopefully, the news will not all be bad. However, have you ever taken a step back and thought about what this profit means?
Let’s look at the case of a plumber called Bill. He is a well qualified and conscientious “tradie” employed by a reputable company and making around $60,000 a year. To earn that, Bill turns up for work every day, probably works quite a number of overtime hours and goes home at the end of the day. He maybe works 50 hours per week in total. He is not worried about any paperwork, generating work, marketing, paying bills, employing staff or ensuring that his BAS is completed on time.
Bill does however know what the jobs he works on are worth to his boss. He looks at the work methods, looks at the income and decides that he can do this much better by himself. “Surely,” he says to himself, “I can make more than $60,000 if I go out on my own”. So Bill resigns and starts his own plumbing business – Plug The Leaks.
A year later, Bill receives his first “package” from his accountant and it tells him that he has made a profit of $70,000 for the year. Now Bill can feel fully vindicated in his decision to go out on his own. Or can he???
Profit adds up to more than simply the number at the bottom of a profit and loss account. Put simply, and with reference to Bill, it falls into two categories:-
- That portion which could have been made anyway by Bill remaining in his previous employment
- The “true” profit which is that which Bill has made in excess of his previous wages.
So, Bill’s first year profit can be broken down to $60,000 which he would have made anyway and $10,000 true profit. However, the additional $10,000 could be said to be payment for all the additional roles Bill has had to take on as a business owner which he did not have to do previously. These include all the paperwork, bookkeeping, managing staff, marketing, quoting for work etc. Is this $10,000 a true reflection of the worth for these functions? Obviously, we do not know as this is a simple example. The question does however need to be asked.
In his original position, Bill was earning $60K for 50 hours per week – an actual hourly rate of (approx) $23.07. If Bill is now working a total of 65 hours per week (including his admin time) and earning $70K, his hourly rate has now dropped to $20.70. Effectively, Bill is working longer hours for a lower return.
There are a number of points I am trying to make here. Probably the most important is that there are a large number of small business operators out there who simply do not make enough profit to justify their being in business. Look at your clients’ financials (and your own!) and do some very simple analysis of the kind we have done here. The look on your client’s face may tell quite a story. The solutions may not always be so easy to find but over coming weeks we will look at some of the possibilities including:-
- Time management issues
- Outsourcing of some admin functions
- Using hardware and software to reduce the burden
- Working “smarter” not harder.
As always at TNG, we welcome and encourage your participation in the debate. Please feel free to leave your comments and suggestions. Also, please feel free to contact Leanne or I if you believe that we can offer some more detailed assistance.
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