What is the most crucial number or Key Performance Indicator (KPI) in a company ?
Marketers would say the value of sales, or conversion rate. Accountants might say the break even point. What number is most important depends on what a company owner wants most from company ownership… commonly a quality lifestyle with both time and money.
If you’re a business owner ponder this question thoughtfully…
Do you want more hard work, less free time, more pressure and more staff, or do you truly want more money, time and freedom. They are very different goals based on different choices and few business owners understand they have a option . They falsely think they have to it’s essential to ~ it’s critical they } grow to to cover rising costs. This is a isn’t true.
This leads us to what the most important number in your business really is.
It’s your Net Profit Margin – or the percentage of operating profit of the revenue .
When company owners say they wish to increase their earnings , what they are truly stating – without realising it – is that they want more turnover and more stress with it. Turnover commonly goes up with profit. More revenue means more responsibility because you’ve got more employees . So why not turn demand for growth into profit margin increase, not just profit or turnover increase, if you want a great lifestyle?
Your Net Profit Margin is a determinant of how efficient your company carries out tasks in your industry.
Do you understand that research collated over many years along from experience and accountants has revealed that 90% of businesses make less than 10% net profit?
Are you in the 90% struggle category?
Do you know what your net profit margin is?
Very, very few business owners do and if you aren’t aware of something, how can you improve it?
To understand the power of this magic percentage let’s look at some figures…
Let’s say your business turned over $1,000,000 and had a 7.5% net profit margin. It would then have $70,000 net profit.
If a company turned over $500,000 and had a 15% net profit margin it would have a $75,000 net profit.
Which business would be less worrying , easier to manage and more enjoyable to be the owner of?
The answer is easy . But why do so very few businesses enjoy a 10% or higher net profit margin? Why are they focused on getting more customers – i.e. higher revenues and not higher net profit margins where revenue increases very little but profits jump, often massively by 100% or more in months?
The simple answer is, no one has told them to or they don’t know how to. This needs to be the focus of their small business management.
Raising your prices increases your net profit margin (everyone knows that) but do you know the other 15 strategies to increase your net profit margin?
Using a combination of up to 15 strategies can result in net margins increasing 10% to 15% (experienced by many of my company’s clients over a 3 to 7 month period). We’ve seen it happen with clients with $400,000 or even $6Million annual turnover with them increasing net margin from 3.8 to 9.8% over 4 months while another increased it from 1.6% to 11.5% in 7 months. So increasing it is very achievable.
Here’s one final thought… Your P & L Statement shows you the average gross and net profit margins. If your net margin is 5% or below its guaranteed you sell products/services at a negative profit . What if you were to find out what you made a loss on and what you made a lot of profit on (identified by accurate measuring)? What would you do? Its something definitely worth thinking about as part of your small business development!
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Hi Aaron,
While NPM is a critical KPI for a small business to achieve a decent profit, I submit that insisting it’s the quintessential metric might be short-sided.
There are several KPIs that play a part in a company’s financial strategy, and these change as the company matures and the company changes from startup to growth to mature business. NPM is a significant component in the beginning because volume is low. But as you grow, it’s more important to build a sustainable business than ensure you’re squeezing every bit of profit out of every sale. Often you do that at the risk of sacrificing a critical element: quality, morale, vision, or the like.
For instance, you wouldn’t want to eliminate the top producer’s club annual vacation even if it would hike the net profit a percentage point because you know keeping your top reps satisfied and fired up is key to your competitive advantage. There are several other areas you could cut costs but would risk damaging the enterprise.
In the startup phase it’s important to keep an eye on the bottom line but later on you want to focus on creating a profitable business that achieves its short-term and its long-term objectives.
Cheers,
Chris
Hi Chris,
Good observation and forethought in your comment, and it’s just plain common sense, but the realities also stipulate that a small business owner has to understand the percentage of operating profit of the revenue (which many don’t), and then they can evolve to the next level of business and it’s future.
Short sighted? No. Understanding your NPM separates small businesses that will survive and those that won’t. In other words, first things first – then move on to level two.
The whole point of this exercise is to be able to determine what a small business owner’s net profit margin is and the different strategies to go about it.
I recently came across your post and have been reading along. I thought I would leave my first comment. I don’t know what to say except that it caught my interest and you’ve provided informative points. I will visit this blog often.
Thank you,
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