I meet so many business owners who draw a good salary but make little profit from their business. Profit is where the real wealth creation happens by way of dividends or drawings to them as an owner. Profit is what is left after all expenses and tax have been paid, yet too many business owners do not run their business to maximise profit.
They complain when their bank will only pay 1% interest on their money yet they often have a business that is paying less than that in ROE (Return on Equity). A focus on profit makes it worthwhile being in business, otherwise get a job and save yourself the worry and stress of having your own business. Profit is the key figure that will be used in valuing your business when you want to sell or exit the business too.
Businesses need to stop making excuses when it comes to performance. Over the last 3 decades the 2.3 million businesses in this country have produced about 3.7% in after tax profit. Australian businesses produce half the profitability of US businesses on average and one third of local businesses ran at a loss! If you include all of your assets and not just bricks and mortar or equipment then you should be calculating your ROE on the total figure.
Other assets not on your balance sheet may include intellectual property and a successful culture that you have created. Often then net assets are artificially low and the ROE looks good but is it really showing true profit performance?
Some public companies stand out because of their performance such as Amcor with a 55% ROE and Blackmores with 41% ROE while many result in an ROE less than the current Bond rate (where your hard earned capital is safer anyway). The problem in my experience is that business owners are not trained well enough to focus on improving profits and so competence and up skilling is required.
I was the Chairman of a company once where the founder said to me that if you can make a better profit it seems to take care of everything else. How right he was! If a business owner or Board focus on growing the profits it will lead to better strategies, higher productivity and wages and more funds for capital investment in the business. This is increasingly important in the fierce competitiveness now coming from Asia. We need more of the world’s best practice in profitability locally, that is why profit is very important now and in the future.
If the world is changing faster than your business you should talk to Tapp Advisory
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