Exploring Your Profitability Gap

When discussing financial results with business owners we often find that owners expect a certain amount of profit from their activity.  

There’s an interesting example to test this out:

  1.  How much do you think you make as a % of revenue?
  2.  Now go to your last set of annual accounts, what is the % of profit compared to your revenue?

The difference between these is your “Profitability Gap”.  This is the difference between expected and actual profitability, or the difference between “gut feel” and “real world” profits.  Use the radio button below to see an example:



Defining what gets included in “profit” for this purpose can get tricky, so its useful to have advisors to help you through it the first time.   For instance, is owners pay included in salaries, expenses or profit?  And what about taxes?  A good accounting system will also remove timing differences between when you pay expenses and collect revenue.


A useful exercise is see if you can take expected profitability (say 30%) and for every dollar of revenue you receive, put this money aside in a separate bank account, leave it alone, and run your business off the rest.  Will creditors pile up?  Will you be able to pay staff?  Will you be able to meet your tax obligations?


How to improve your Profitability Gap?

  • Put a % of revenue received away and see if you can run the business on the rest
  • Reviewing your monthly committed spend
  • Improve cash collection of revenue
  • Review clients you may be under charging
  • Review how much owners are paying themselves


Disclaimer: Information provided to the best of the authors knowledge at time of publication.  Laws are subject to change and independent advice should be sought before considering an investment decision.  The above information is general in nature and should not be construed or relied on as a recommendation.