Profits and the cake of your business

Your profit and loss sheet tells a story. It tells the story of how your business is doing financially, both in the past and right now. If you are in the habit of looking at the number right at the bottom, the net profit, and thinking oh dear, that’s quite a small number, then the answer to why that number is small and what you might be able to do about it is in your percentages.

Think of your business as a cake. The whole cake represents all the money coming into your business through sales, i.e. your turnover. That cake is then cut into four slices one each for cost of goods, staff, operational costs and profit. Each of those four slices is a percentage of your total sales, or the whole cake.

So, for example if your total sales for the year were £100 your cost of goods was £20 (20%), your staff costs were £40 (40%) and your operational costs were £20 (20%) then your profit would be £20, or 20%.

Percentages might not seem to matter that much, who cares about the percentage surely it only matters if the profit is big enough? They matter in any business because they help the business owner understand how their business is performing financially and what the impact of any decision or turn of events might be. They matter particularly in food and hospitality businesses because the food and hospitality industry is a traditionally low profit margin industry. There is variation of course but the average profit margin for a restaurant is 2-6%. Cafes have an average profit margin of around 8% and bakeries are similar.

A 2% profit margin is fine if you’re Tesco or Sainsburys, their cake is so massive that a 2% slice is still a very big slice. If you’re not Tesco of Sainsburys it may well be more of a problem. If your business has a revenue of £500,000 that sounds like quite a lot of money, but if your profit is 2% then that’s £10,000 which probably isn’t feeling great.

There are no hard and fast rules about exactly what your percentages should be as it depends on your type, and stage, of business and whether you are drawing a salary or are just left with whatever the profit is. If your profit percentage is in the single digits however, it is probably a good idea to look at how you might tackle this. And that will be the subject of next week’s blog post. There we go, a cliff hanger for you.