Understanding Profit

Are you sure you understand the difference between gross and net profit, and how to calculate your profit margins? It's surprising how many business owners are vague about this. In a small business you may trust your accounts staff to give you the figures and reports you need, whether or not they are deserving of your trust. In a micro business, you may not have the staff to deal with these aspects.

Your profit margins are a key indicator of the health of your business. You need to know what they are, if they are changing and why. If your profit margin is going up, you can't afford just to sit back and congratulate yourself. The rise could be temporary and the fall that follows could be a serious crash. You need to recognise the reasons for the rise to predict what will happen next, and to learn the lessons that might help you to keep it high or repeat the momentum. If the margin is going down, you must understand the reason so that you can do something about it.

Gross Profit or Net Profit

Gross profit is the amount of income you receive from a product or service, less the amount it costs you to provide it. Knowing or predicting your gross profit helps you to decide what products and services to supply.

To arrive at your net profit, you have to add all your overheads into the equation. For interested parties, such as lenders, your net profit is what counts. It should also be the most important to you because, even if you are getting a good gross profit margin, if other expenses are too high, the net margin can still be very low.

The Profit Margins

It's easy to arrive at your gross profit margin. You divide your gross profit per item by its sale price and multiply that by 100. That gives you your margin as a percentage figure.

To arrive at your net profit margin is a lot more complicated, because you have to get your overhead figures right. They might include wages and salaries; the expenses relating to your premises; equipment; travel and communication costs, and so on. You'll have to average them out to monthly, weekly, daily, or whatever period you choose to check your net profit margin. A similar calculation takes that into account as well as your total sales for the period and the direct costs of producing them.

Whether you do it yourself, or get these figures from staff or outsourced bookkeepers, to have real confidence in the health of your business, it's best to have a good understanding of where the figures are coming from.

How Healthy Is Your Credit Rating?

The credit rating of small businesses doesn't just affect how much cash you can borrow. It can also affect the amount and timing of the credit your suppliers will allow you, and whether you can source materials from new suppliers as quickly as you need them. It can even affect your order book if potential customers believe your finances are not sound enough to be sure you will be able to complete a contract. Some businesses will not trade with you at all if they believe your credit rating is poor. You really do need a good credit rating.

Different Credit Agencies May Give Different Ratings

That's okay, you say, you already have one. That's good, but unfortunately when other people check it, they may not get the same picture. It could depend whether they check it with the same agency as you do. If you compare recommended amounts of credit from several different agencies, you may get a very wide variation in the amounts.

Accountancy firm Shelley Stock Hutter decided to check 100 companies with three different agencies over a period of two years. They not only found these massive variations – one company's credit limit recommendations varied between £7,000 and £290,000 – they also gave very different limits when checked again a few months later.

At present the agencies do not have to divulge how they make their decisions. They all use different kinds of information to measure credit risk, but it is hard to see how they can justify such broad fluctuations. Nevertheless we have to live with them.

What Can Be Done About it?

When you are deciding whether to do business with other companies, you'd be wise not to rely solely on a single credit rating. Where appropriate, ask to see business plans and management accounts. Your outsourced bookkeepers would most likely be able to give these a once over for you, and let you know how they feel about them. Unless you can cover the risks, don't take any chances. Perform a mini due diligence exercise.

Where you are seeking credit for yourself, you need to offer your own up-to-date business plan and accounts for scrutiny. Again your outsourced bookkeepers could help with the preparation of these. It would be a really good idea to get at least a template of these prepared so that they can be made available at short notice whenever they are needed.

Go the Extra Mile for Your Customers

One of the current conundrums for small businesses is how to cut costs without letting customer service standards slip. In a recent survey of 2000 consumers by the accountancy software company Sage UK, they found that customer service performance was becoming even more important. Nearly a third of their sample reported that they wouldn't give a second chance to suppliers who let them down in some way.

Consumers are Getting More Demanding

Providing outstanding customer service has always been an important factor in business success. Keeping your customers happy brings you repeat business and saves on the time and money needed for marketing and pitching for new contracts. Now it seems that consumers are seeking more for their money in terms of the type of service they receive, both when they buy and following a purchase.

The basics of good customer service are just being polite, helpful and responsive to the customer's concerns. Whatever pressures you and you staff are under, they must be put out of mind at times of interaction with customers, so that you can all appear upbeat and friendly, and listen to what the customer is saying. In the Sage survey, only 22% believed that businesses they dealt with were giving outstanding service while riding out the economic downturn.

The Extra Mile Campaign

Sage's extra mile campaign has been launched to provide some recognition for companies providing good customer service. You and your customers can use the #extramile hashtag on Twitter to get public appreciation where you think it's deserved.

If you'd like to be nominated, get your staff to brush up their customer service practices. Set a good example by treating your personnel the way you'd like them to treat your customers. Welcome them each day with a friendly smile; get to know them by name and remember their birthdays and other things that matter to them; listen to their niggles and deal with them; ask for their feedback and give them credit for useful ideas.

Make yourself available to customers too, and always be ready to deal with complaints in a way that doesn't leave them feeling let down. Remember that statistic about not getting a second chance. Here's another one that comes from a different survey: of customers who are satisfied that their complaints are dealt with quickly and reasonably, 72% will continue to use the company they complained to.

Are you going the extra mile for your customers? Who would you nominate for the Sage UK extra mile campaign? Perhaps it will be your outsourced bookkeepers.