PROFIT – (or lack thereof). For purposes of this article we will be discussing net profit, not gross profit. Net profit, minus taxes, is what you get to keep; it’s what you can put in the bank. While we have seen a number of businesses over the last year or so with pretax net profits in excess of 30% we view them as something of an anomaly when compared to the vast majority of businesses out there.
So what was your profit (as a percentage of revenue) last year? What is it year to date this year? What was it supposed to be? The year to date this year could be more or less than last year because of a number of factors one of which is that you don’t have a complete business cycle with which to compare it to. You always want to be comparing “apples to apples”.
If your profit was better than it was supposed to be then good for you, if not there is a pretty good chance that you didn’t engineer the profit percentage you wanted into your business formula. You are therefore treating profit as a “residual” that is, whatever is left over, good in the case of profit or bad in the case of a loss.
In simplistic terms, profit engineering is treating profit as the first item of expense. You can do this by establishing a realistic profit percentage, and reverse engineer everything else back through your business formula. Sounds simple? Not so; you actually have to have the proper operating infrastructure in place and a number of what we will call “business tools” and the knowledge of how to use them.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: