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Make profit your first cost

Looking for profit improvement? Make profit your first cost. Sounds weird but it works. Find out what it means and how this thought process can deliver profit in to your business.

The thought process is very simple and here is a recent example we gave to one of our clients in the retail sector:

Let’s say that sales in the next twelve months will be £750,000 and that the business achieves a 40% margin on its sales.

The gross profit from £750,000 of sales will be £300,000. This means that if they spend £300,000 on overheads there will be no profit.

However, if the owner of the business wants to make a profit before tax of £60,000 then pencil in £60,000 as the first overhead cost and then figure out how to spend only £240,000 on all of the other overheads such as staff, premises, marketing etc.

By budgeting on this basis your profit for the year is baked in to the process very early on and you have to take action, NOW, to control your other costs so that the profit you want will be yours, provided that you hit the sales and margin targets.

Plan for profit improvement

Most businesses in their budgeting process have profit as the final answer because they think about revenues and costs first – profit (or loss!) is the balancing figure at the end. It’s totally reliant on everything else.

By treating profit as your first cost you turn the normal thought process on its head and the costs, which you have most control over, become the variables to be addressed in order to achieve the profit you want.

 

Michael
@diaryofanomb
 

We give practical, profitable financial and business advice to a wide range of companies – should yours be one of them?  Visit our dedicated Profitability services page to learn more about how we can work together.