The Importance of Showing a Net
Showing a net profit is an undeniably important aspect of running a business. Effectively, net profit indicates whether or not a company is doing well and, when it comes to long-term growth and prosperity, is essential.
Net profit, or the bottom line, is the final profit calculation on the income statement. It is the remaining profit in the company’s back pocket after accounting for all expenses, including tax and interest.
So, why is showing a net profit so important? There are many reasons. Let’s unpack them.
Ability to Borrow Money
Almost every business will rely on equipment finance to purchase new gear at some point. When assessing the viability of a loan, lenders conduct servicing. Servicing determines whether, after you’ve honoured your existing monthly expenses, you have capacity to repay the proposed loan commitments. They derive your capacity from your net profit.
Put simply, are you making enough profit to repay your loan? Lenders are more likely to approve it if you are. Conversely, if you aren’t showing a net profit, the lender will be hesitant to loan you the money.
No business wants to stay stagnant. Growth and expansion are important considerations that ensure your business remains relevant and competitive in the market long-term.
Net profit facilitates growth by allowing you to reinvest in your business. It may allow you to expand your fleet or the areas you service and hire more employees. The expansion of your fleet could allow you to tender for jobs you wouldn’t have been able to without that specific equipment, whilst hiring more employees could allow you to take on jobs that you previously didn’t have scope to pursue. If managed effectively, winning additional jobs has a flow on effect of helping you derive more profit.
The important thing here is to note that growth should be in line with the business’ strategic plan and accompanied by strict budgeting, not undertaken just because you have the money to do so. Growth does not equal profit just by default. You must ensure that you are equipped to manage the expansion. There is no point reinvesting in your business if you are not set to profit further off the expansion. This means there needs to be a genuine need in the market for the service, and beyond that, you need to have appropriately skilled staff, equipment, and time to facilitate the expansion, within a predetermined budget.
Paying Yourself Dividends
A dividend is the money paid by a company to its shareholders from retained profits. You work hard and deserve to reap the rewards. Showing a net profit affords you the opportunity to do so as you can draw a dividend from the business. While this might not be possible in the first few years of operation, it is certainly an attractive motivator to keep striving to improve your profitability.
Gauging Operational Efficiency
Showing a net profit can be a good indicator of operational efficiency. In essence, if you are making money and the cogs of your business are turning efficiently, you should be rewarded with net profit. On the other hand, failing to show a net profit could be an indicator that operating costs and overheads aren’t being contained.
Having this knowledge allows you, in the first instance, to track and compare your current financial position against your projections. Furthermore, it allows you to formulate projections for the following financial year based on what you achieved financially this year.
What if I’m NOT Showing a Net Profit?
Your business isn’t unsuccessful just because it’s not showing a net profit. There are ways to improve your profitability to support your long term sustainability, for instance:
- Temporary Full Expensing – by utilising the government’s Temporary Full Expensing scheme, you can reduce the amount of tax payable on new purchases, allowing you to hold onto your cash. This should be positively reflected in your net profit.
- Take a deep dive into your expenses – maybe you’re paying too much for utilities, internet, or rent. It is worthwhile assessing and comparing these to other options in the market to make sure you’re not overpaying. You could save hundreds of dollars a year by drilling into these basic expenses.
- Look into insurance premium funding – if paying your insurance premiums upfront is eating into your net profit too much, consider funding them. You can pay for your premiums in a similar way to equipment finance by utilising Insurance Premium Funding. You can preserve cash by repaying your premiums in easy monthly instalments rather than upfront. This will then be reflected in your net profit.
- Reduce labour – Reducing labour can have a massive impact on your profitability. While it may not align with your long term growth targets, it can be an effective cost saving measure in the short term.
At Magnolia Lane, we tailor finance solutions specific to your unique business needs. It is our role as your equipment finance broker to source the best possible rate for you. Through our accreditation with a suite of lenders, there really is no limit to what we can assist with. Contact us or get a free quote today and let’s grow together.