How much do you get under the hood of what your numbers mean in your Profit & Loss account?
As business leaders, it’s crucial to dig deeper into our financial numbers. Let’s break down a simple example to illustrate this:
🔷 Scenario:
Fees Raised: £2,000,000
Cost of Fee-Earning Staff (including NI and benefits) + Direct Materials and Disbursements: £1,100,000
Gross Profit: £900,000
Your Gross Margin is 45% (£900,000 / £2,000,000)
Now let’s say your total Overheads are £500,000
Your Net Profit Before Tax is £400,000
Your Net Margin is 20% (£400,000 / £2,000,000)
To cover these overheads, you needed to raise sales invoices totaling £1,111,111 (calculated by dividing £500,000 overheads by the 45% gross margin).
This means your break-even point is £1.1 million after which you make a profit.
🔷 Now look at your Overheads total:
Investment Costs: How much is spent on:
🔹 Advertising and Marketing?
🔹 Staff Training?
These are your investments for future growth.
Your Salary: Do you:
🔹 Take a market salary; or
🔹 Is your salary optimised for tax efficiency, and you take the remainder taken as dividends?
If the latter, then your ‘actual’ profit is not as high as £400,000.
Running Costs:
How much is spent on:
🔹 Premises Costs (rent, rates, electricity)
🔹 IT Software
🔹 Support Staff who handle admin tasks, allowing you to focus on the business?
Remaining Costs:
What’s left after accounting for these expenses?
🔷 Year-on-Year Comparison:
🔹 Have you compared your gross margin percentage and total overheads to the same period last year?
🔹 Do you understand the reasons for why they have changed?
🔹 How much was planned increases to support you as you get bigger, and how much price and other increases?
🔷 Actionable Steps:
🔹 Regularly review your financials to ensure you’re making informed decisions.
🔹 Consider benchmarking your financial performance against industry standards.
🔹 Adjust your strategies based on your analysis to balance profitability and growth.