Why last years net profit guides this years sales

Net Profit knowledge matters if you run your own business.

Knowing the net profit in your SME is a brilliant way to reassess how you look at your sales effort. It’s also a great way to consider your purchasing habits. It might sound strange at first but let me explain. Your net profit figure in your previous accounts is a crucial number to take into account.Andy Cheetham Business Blogger

Let’s for arguments sake say that an SME has a turnover of £200,000. After all of it’s costs the taxable profit is £20,000. When all is said and done that is 10% of turnover. Or to put it another way for your business to make £20 you would need to sell £200 worth of product or service. So if you are thinking of buying a new printer at a cost of £300 you would need to sell £3,000 worth of whatever to pay for it. That printer looks a bit more expensive now doesn’t it?

Knowing what you need to sell to pay for anything is a great guide for all business owners.

It’s a very simplistic way of looking at things but I would say it’s the only way of looking at things if you are an SME owner. That is if you want to run a tight ship anyway. It’s also a great way to assess your sales efforts. To buy that printer you have sacrificed the margin on £3,000 worth of sales. Or you need to find another £3,000 worth of sales to pay for it.

You can over analyse this type of scenario if you want to. Your accountant might say, Yes but …. However, the point is you need your business to acquire some fat. Laying down some fat in business terms means keeping hold of as much of your turnover as you can. A lot of  well known businesses don’t have palatial offices. Those are the well run ones in my book.

Spending it versus investing it.

Knowing what you need to sell to lay down some fat in your own business means taking some painful decisions. It’s easy to spend it but don’t make any luxury purchases unless you’ve got plenty of free cash. Certainly don’t be impressed by the spending habits of other businesses or “entrepreneurs”. There’s a lot of entrepreneurs around these days! Investing in your business requires a financial outlay but an investment should have potential for a payback. An investment might lower your costs or increase your sales. That will increase your net profit, or have a good chance of increasing it anyway!

Spend out of profits not capital.

If you are able to aim to make your purchases out of profit not capital. You can’t do this when you are setting up your SME of course. However, you can make profit to pay for the things you might want to have. I’m referring to the non essential things here. Don’t buy that shiny new desk or commit to a brand new iMac until you are laying down fat. Those things can wait, they aren’t investments and they cost a multiple of your new profit remember. An ebay desk is just as practical as a new one from John Lewis. A Travel Inn bed is just as useful as one in the Dorchester.

I hope this makes you think twice about what you spend in your SME. As my Dad always used to say to me – CASH IS KING! So look after it!