We’ve gone through a lot of theory about profits and finance without having to resort to many numbers examples.
That’s about to change to help you to understand the Profit Gaps in your business. I do the best to keep the numbers simple.
Calculating Your Profit Gap – A Worked Example
The first figure to determine is how much the owner wants to earn from the business to fund the ideal lifestyle (keep it realistic).
A) Profit wanted £100,000
The second figure in the Profit Gaps analysis is how much the business owner should earn based on the time and money invested in the business.
Cost of owners time is split into three categories based on time:
Professional work £36,000
Technical work £12,000
Clerical work £8,000
Market value of owners time is £56,000
Market value of owners money £4,000
(based on money invested in the business and what it could earn elsewhere)
B) Profit the owner should earn £60,000
(combining the costs of time and money)
The final number in the Profit Gaps Analysis is how much the business owner currently earns.
Profit before tax per accounts £6,500
That’s after deducting the following
Owners salaries & payroll costs £22,000
Pension contributions £5,000
Other benefits like a car or private health care £7,500
Adding everything back that gives:
C) Profit before owners profit extraction of £41,000
(That’s £6,500 + £22,000 + £5,000 + £7,500)
Profit Gaps Analysis
A – Wanted Target Profit £100,000
B – Should Earn Profit £60,000
C – Does Earn Profit £41,000
The total profit gap (A – C) is £59,000 – i.e. profits need to increase by 144%
The under-performance profit gap (B – C) is £19,000
This is the first priority to fix and may mean reducing costs (later in Pillar 1), changing what the owner does in the business (see Pillar 2) and finding ways to release the hidden profit in the existing customer relationships (see Pillar 6) .
The super profit gap (A – B) is £40,000
This comes from being a more effective entrepreneur and the answers may come through in any of the Pillars.
It can come from finding a competitive advantage from the business providing something of unique value to customers.
Or it could come from finding operational improvements, like being a particularly effective sales person – or employing one.
Return to P1M2 What Is Profit
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