What Drives Profit?

valuepricing Feb 12, 2019

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 its 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 profit 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:

Sales - Direct Costs = Gross Profit

Gross Profit - Fixed Costs = Net Profit.

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 do 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 want to discover more about these nine drivers and learn about how they work, it’s all in my book: Price: The Fastest Way To Change Profits. You can buy it here.

And if you want to join my Facebook Group “Value Pricing for Mark Wickersham” click here and join a community of like-minded accounting professionals learning how to price better.

Wishing you every success on your pricing journey.

Mark Wickersham

Chartered Accountant, public speaker and #1 amazon best-seller of “Effective Pricing for Accountants”

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