It is easy to get caught focusing on how to pay as little tax as possible. But tax minimisation is only part of the puzzle. The most important part of the puzzle is making money to begin with.
Every business has key drivers that make the most difference in how profitable the business is. We call these Key Performance Indicators or KPIs. Given that the KPIs have the most influence on the success they should get the most attention!
While every business is different there are some fundamentals that are pretty universal across business.
Every business is different so every business’ KPIs are different. For example for a hotel operator vacancy rate is a KPI but that won’t work for a labour hire business. A more appropriate KPI for a labour hire business is productivity (i.e. how much of their time worked is charged to customer). Don’t get caught thinking there is only one KPI for every business though as that is not true.
Sales– it is all about getting the sales you need to generate the profit you want. Sounds open ended and it is but there is a formula you can apply to any business to break down the sales:
Any change you make in 1 part of the above formula has a compounding effect so makes a big difference. But you can think about what directly influences the invoices you raise and therefore the amount of sales you generate. I.e. labour hire business has a charge out rate x number of hours charged. So those are 2 potential KPIs but what if they charge will the customer actually pay that price? So that is where efficiency and recovery of their rate becomes important to measure too.
Margin– what are the direct costs that go into every sale these are called Cost of Goods Sold or COGS (i.e. for every $100 product you sell there is you are going to spend some money on materials and/or labour). The remainder is called Margin or Gross Profit or GP. The best KPI here is simply the Margin as a percentage of sales (i.e. GP/sales). If you carry stock you may also want to measure Inventory Days (i.e. how long it takes to turn over your stock). If you have a large wages cost in your business then Wages as a percentage of sales is great to measure too.
Overheads– these are the costs of the business that don’t directly change just because sales change. Advertising, Insurance, Rent, etc. You want these as low as possible but it can be wasteful to invest too much time trying to squirrel these down compared to the difference that can be made in the above 2areas. A couple of KPIs you might consider here:
o If you have a major overhead such as rent then taking that as a percentage of sales (i.e. rent/sales = %)
o Overheads total as a percentage of sales (i.e. overheads/sales = %)
Profit– is the profit enough to cover your commitments, personal living and the taxes due on that profit? If not then something needs to change in the above 3 areas and/or in where you profit is being spent (i.e. reducing commitments, personal spending, etc.). Profit as a percentage of sales is a good KPI to have in your mind so you know how much you are keeping per sale.
If you don’t already know your KPIs and actively monitor these then get this in place ASAP it will make a massive difference. If you want to check off on the KPIs you have come up with or don’t know where to start then get in touch we love helping with this sort of stuff.