Author: Tony Rule, Partner, TAG Financial Services
What drives profits?
In this three-part series, Tony Rule sets out the three key questions that need to be addressed to achieve better business profits.
I was recently asked by David Guest at Outcomes Business Group to present to a group of business owners to help make their business better for them. The topic was we focused on was “Data Driven Profits”. In this three-part series, I will set out to answer these 3 questions.
- What drives profits in a business?
- Which data is the most important for business profits?
- How should you use that data to grow profits?
So, what drives profits in a business?
It’s who not what.
From my experience in helping small and medium sized businesses thrive over the last 30 years, the key question is not “what” but “who” drives the profits in a business?
Each business needs one or more leaders with a vision to drive the business. These are the people that set the minimum accepted standards by which the business will perform. These people should set the expectations for the business and determine the actions if those expectations are not being met.
You have probably heard me say before that if business owners are not careful, they will end up:
- Working the Hardest,
- Taking all the Risks, and
- Getting paid the Least
It is for this reason that Business Owners should be especially focused on achieving their desired profits. But here lies the conundrum – often business owners do not have a target for their performance and their business. If they do not have a target, they cannot determine whether they are getting what they deserve from their business.
Sometimes I wonder whether business owners fail to set clear goals for their business for fear of not achieving that target. I think for some business owners, not setting clear targets becomes a comfort zone because when those targets are not achieved, they will need to upset the status quo by determining new actions to drive the performance of their own business.
Here’s an old thought that still holds true. About 500 years ago, Michelangelo (the Italian artist) said “The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low and achieving our mark”.
As business owners, it is up to us to make sure that we are being properly remunerated for our effort and our investment in the business. We invest both our time and money into our businesses, but often we do not measure these investments like an investor would.
- Our hours in the business need to be matched by a market salary for our effort – what would you need to pay someone else to come in and do what you do in the business?
- What would be our minimum rate of return if we were investing in someone else’s business – how much have we invested and would we require a 20% or a 30% return?
The first step as a business owner is to get focused on what the business must do (i.e. the minimum accepted standards) which will then help determine the actions that need to be taken.
Make sure to read the next part in our three-part series to find out more on “Data Driven Profit” or contact us on 03 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2021. Please do not reproduce without the expressed written consent of the author.