What Drives Profit?

The world is changing fast

We now have Cloud Technology and Cloud accounting that automates a lot of the work we do. The old compliance work is getting automated through machine learning and artificial intelligence.

As a profession, we have to change.

We have to start doing more for our clients, and one of the things we can do is help them increase their profits.

This isn’t so straightforward. You can’t manage profit. You can’t go into a business and improve profitability by focusing on profit.

What we have to do is understand what drives profit.

You can watch the full video here.

What are the drivers of profit?

There are a number of different drivers of profit. We can build a mathematical model that predicts profit and allows us to see what is impacting on profit and how it does that.

I want to share with you some of these drivers to give you an indication of how we can start helping our clients to improve their profits.

We can start by thinking about a set of financial statements. What we show in financial statements is this:

In a set of accounts, we see what drives profit is sales, less the direct costs, less the variable costs.

But this is a bit simplistic. It doesn’t help us very much and it also means that as a profession we are too fixated on costs.

Focusing on costs is the worst place to start. If we want to have a big impact on increasing profit we need to focus on the top line sales. There is no limit to that.

But sales, just like profit, is impossible to directly manage. It is the end result to a whole bunch of other drivers. So we need to understand those drivers.

Sales is essentially made up of three things:

• How many customers do we have?
• How much does each of those customers spend on average each time they do business?
• How often do they do business?

If we can work out those three numbers, then we can easily measure sales.

Once we understand that, we can start to manage each of those three numbers. The mistake many people make is to focus on winning more customers. Accountants and bookkeepers do this all the time.

We’re obsessed with winning more customers, but it is much easier to focus on the other two drivers. Particularly if we break them down into their components. 

One of which is price. Price is the fastest way to change profits.

If you found this valuable and would like to learn more about value pricing, I run a free live online training session every month with a topic chosen by you. Attend live and you can ask me any questions you have. Click here to register and I will send you an invitation to the next session.

Wishing you every success on your pricing journey

Mark Wickersham

Chartered Accountant, Public Speaker and Author of Amazon No.1 Best Seller “Effective Pricing for Accountants”