Author: Tony Rule, Partner, TAG Financial Services
In part one of our three part series, we discussed the idea of business owners focusing on what the business must do to turn a profit and achieve a return on investment. This week, we continue the idea of “Data Driven Profit” with step 2: Which data is most important?
Which data is the most important in driving business profits?
Well, surely it is the data that gives business owners clarity around their desired result and the actual performance of their business.
The goals of the business owner around the profitability of the business should be set out in the profit budget of the business.
There are two big mistakes that business owners make at this point:
- They do not have a budget for their business for the next 12 months
- They have a very complex budget for their business for the next 12 months
When there is no budget, there is no means of keeping score. Your profit or loss for the year becomes what is “left over” for the business owner and there is nothing to drive performance against.
Where there is a complex budget (and the business owner is not adept at working with numbers), there is no clarity about how the business is performing on the scoreboard. Often well-meaning accountants will construct a complex budget thinking that this will help the business owner. The business owner will invariably revert back to running the business off gut-instinct because clarity is lost in the complexity.
The best budgets are based on the minimum acceptable profit determined by the business owner, which are then converted into five key measurements being:
Profit + Fixed Expenses = Gross Profit + Cost of Sales = Sales. Then reverse the order.
Once each number is calculated to arrive at your minimum profit – you are left with your simple and clear budget report. Just five key numbers.
Using this strategy any business owner is able to create a clear and simple budget that they can not only follow, but more importantly, be measured and held accountable for. This will allow the business to have clarity around their goals and how it can achieved.
If you would like to chat more about how to create a simple and successful budget, contact us on 03 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2021. Please do not reproduce without the expressed written consent of the author.