July 20, 2016 at 7:20 PM
DaltonPlan® Business Information Newsletter
Setting the Benchmark for Business Performance ● Issue 120 - 2016
Have you ever wondered why some business owners in your industry seem to be doing better than you? How is it that they always drive the latest model car? The answer could be that they know about Business Benchmarks for Profitability.
What are Business Benchmarks?
Industry-recognised Benchmarks for Profitability, as published by some business organisations in New Zealand, are typically derived from the top-performing companies within any particular industry and are generally referred to as a target for lower-performing businesses to aim for.
DaltonPlan® Business Benchmarks for Profitability
However, at DaltonPlan® we have recognised that it is possible for businesses to perform at levels significantly higher than industry-recognised benchmarks. We have worked with hundreds of New Zealand business owners across a wide range of industries, many of whom operate well-organised businesses that often perform above the New Zealand Business Benchmarks for their industry.
So... what we have been able to access and compile are the 'real time' business benchmarks of companies operating in both Service and/or Product based industries that outperform the standard, industry-recognised benchmarks.
The next question you may ask is, "What are the DaltonPlan® benchmarks for my particular industry and how do I achieve them?" Here's the background – stay with me.
SERVICES – Hourly Rate "Earned"
For the Service industry, one method is to measure the hourly rate "earned". This is used in various industries such as computer consulting or training organisations, which are businesses that offer mainly labour-only services and may sell a limited range of products.
Most businesses "charge" an hourly rate for their services, let's say for example, of $120/hour ex GST. However, the DaltonPlan® benchmark for profitability might require an hourly rate "earned" of say $150/hour (all Expenses being normal) so there is a shortfall of $30/hour.
I know – I can hear you saying, "No way can I charge my clients that" – still stay with me – here's how it's done.
Explanation: For example, for one hour of service delivery, an hourly rate "earned" of $150 could be made up from;
• $120/hour for the charge-out rate plus
• $ 30 Gross Profit from the sale of a product and/or
• $ 30/hour mark-up on a subcontractor's fee
PRODUCTS – Gross Profit and Net Profit as a % of Sales
Another method is to measure the Gross Profit as a % of sales. This is used in various industries, for example, such as retailing, restaurants and the trades where a mark-up is added to the cost of products, materials and the cost of labour.
The two main profit indicators we monitor are:
Gross Profit (Sales – Cost of Sales)
Net Profit (Gross Profit – Expenses before Drawings, Interest, Depreciation and Tax)
Gross Profit - As an example, let's say that a number of businesses in any particular industry achieve 40% Gross Profit. However, the DaltonPlan® benchmark for profitability for that particular industry might show that it is possible to achieve 50% Gross Profit. So that's an increase of 10%. BTW, 10% of $1,000,000 Sales = $100,000 Gross Profit.
Net Profit – By achieving a superior level of 50% Gross Profit, the DaltonPlan® Business Benchmarks show that it is also possible, in turn, to achieve a higher Net Profit of say 25% (before tax). Most businesses in that industry might be achieving say 10% - 20% Net Profit.
A Generic DaltonPlan® example simply put...
This simple DaltonPlan® benchmark model above shows, for example, that for every $1 of Sales, a higher level Net Profit of 25c before Tax might be achieved. This equates to say 17.5c after Tax. On the other hand, an underperforming company might make say 15c Net Profit less 4.5c Tax = 10.5c after Tax. On Sales of $1,000,000 that's a difference of 7% or $70,000 Net Profit after Tax.
This shows how important it is to be aware of the DaltonPlan® Benchmarks for your industry so that you can make more money for the same amount of effort.
There is an excellent booklet on our website that I've written that covers this topic in more detail showing examples of how you can achieve the superior DaltonPlan® business benchmarks.
Click HERE to purchase my booklet.
So to finish, if you think that you may not be achieving the benchmarks specific to your industry, you could be earning a lot less than you should be earning for the same amount of effort. That could be why the business owner down the road seems to always drive the latest model car! Smarter not Harder.
If you have any questions after reading this information, go to Contact Us on our website www.DaltonPlan.co.nz and type in your request.
By Dean Dalton DBA
Director, DaltonPlan® Business Action Planning Limited