Profit drivers are factors that have a significant impact on your bottom line. Trading accounts and profit and loss statements usually contain information on profit drivers for a particular business, and can be extracted very easily. By identifying the profit drivers in your business and focusing on them, you can achieve the best growth results.
Profit drivers can be categorised as financial and non-financial.
Financial profit drivers
Financial profit drivers are directly associated with dollar figures and are most commonly considered in relation to profit. Examples include:
- fixed costs
- variable costs
- sales volume
- cost of debt
A financial profit driver ratio may be expressed as a:
- number (e.g. average number of sales per month)
- dollar figure (e.g. the average sale per client)
- percentage (e.g. percentage of clients who are repeat business)
Data for the calculation of financial profit drivers is usually reflected in your financial statements and reports.
Non-financial profit drivers
Non-financial profit drivers also impact your bottom line, even though they're not expressed in dollar terms. Customer satisfaction, for example, will always impact on the number of goods sold and increase or decrease profit. Bad weather may also impact sales.
Non-financial profit drivers include:
- client satisfaction
- quality of the product or service
- training of employees
- employee satisfaction (morale)
- business culture and values
- product and process innovation
- market share
- employee safety.
Ranking your profit drivers
Think about your own business and the relative importance of its profit drivers. Once you have determined your profit drivers, work out why they're important to the success of your business. This will help you rank your profit drivers from most important to least important in terms of their direct impact on your business goals.
The top profit drivers common to most businesses include:
- increasing sales (turnover)
- reducing cost of sales
- reducing overhead expenses.
Calculating your business's turnover
One of the most significant profit drivers is sales revenue or turnover. There are 3 simple factors that determine turnover for a business:
- number of customers
- average number of transactions per customer each year
- average value of each transaction
Use the following interactive calculator to help you work out your turnover. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see your turnover.
To improve your business's turnover, you need to improve its performance in one or more of these 3 areas. You must acquire more customers or sell to them more often or increase the amount you sell to each of them.