Home – New Forums Money matters Understanding profitability in business

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  • #987452
    Karisha Trading
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    Hi everyone,

    I am struggling with a concept.

    I am operating a wholesaling and distribution business.

    Looking at some figures this morning, I make a gross margin of 26% and a net margin of 3.2% and I turn my stock over 3 times in a year.

    If I am making 3.2% nett, would it not be better investing the money in another vehicle such as the property or stock market? Is keeping the money in the business more worthwhile than those other investments?

    I figured that because the capital is turning over 3.2 times in a year, it is potentially growing the money I am reinvesting but could not make that work mathematically using an investment of $100k as the starting point.

    Thanks for your help.

    #1162784
    Glimmer
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    Very difficult to comment without understanding the business a little more but from a basic viewpoint you need to look at the 3.2% and is it 3.2% of your complete investment or is is 3.2% of revenue created starting from your initial investment.

    Either way then you need to look at your business as a whole… is it something you can grow to sell… is it something where you need to look at what you sell in order to increase revenue… do you need to look at costs to improve profits… and another 30-40 questions…

    Far too many questions for a forum… my advice…. have a chat to your accountant or a business consultant, get them to look at your business as a whole and offer you some options and opinions.

    Peter Martin
    Business Consultant
    0421 802 821

    http://www.glimmermc.com.au

    #1162785
    MissSassy
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    This is really a question that is better answered by an accountant that can take in your circumstances as a whole.

    Chances are your personal circumstances will also be relevant, this is where your accountant or a good accountant can help you.

    #1162786
    Tony Manto
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    All good answers so far.

    You need to look at your cost of doing business.

    What are your competitors charging(are you too cheep).

    What is your product mix?

    Are there more profitable items you can sell?

    Selling it, isn’t really the answer as if you are not making enough money, why would anyone else want it?

    So, so many questions I agree…. You really should talk to an Accountant or business adviser as recommended.

    #1162787
    James Millar
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    Karisha Trading, post: 188157 wrote:
    Hi everyone,

    I am struggling with a concept.

    I am operating a wholesaling and distribution business.

    Looking at some figures this morning, I make a gross margin of 26% and a net margin of 3.2% and I turn my stock over 3 times in a year.

    If I am making 3.2% nett, would it not be better investing the money in another vehicle such as the property or stock market? Is keeping the money in the business more worthwhile than those other investments?

    I figured that because the capital is turning over 3.2 times in a year, it is potentially growing the money I am reinvesting but could not make that work mathematically using an investment of $100k as the starting point.

    Thanks for your help.

    It’s refreshing to hear someone making an objective assessment of their business financial return versus other investment options.

    As Glimmer points out, you need to modify you analysis slightly because it is currently comparing the wrong data. A 3.2% net profitability on revenue metric is not the same as a 3.2% return on invested capital (ROI). A better comparison would be the business ROI versus other investment alternatives. Keep in mind that these comparisons should also be adjusted for different risk levels. For example a 3.2% return from a secure low risk investment (bank term deposit) is superior to 3.2% return small business ROI.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1162788
    StevenMelbourne
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    Objectively 3.2% is not great, you can get 4% in a bank on term deposits.

    Whether you should continue to operate depends on many things:

    1. Is your business growing or shrinking?
    2. How passionate are you about your business?
    3. If you decide to sell, can you realise the $100k (not many people would buy a 3.2% net margin business unless it’s growing very fast)
    4. Is your business paying you a decent salary and your net margins are pure profit to you?

    Cheers,
    Steven

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