How Do You Know You're Profitable as a Small Business Owner in Australia?
Disclaimer: This blog post is intended for informational purposes only and does not constitute legal, financial, or medical advice. Please consult with a qualified professional for advice tailored to your specific situation.
Running a small business in Australia can be both rewarding and challenging. While it’s exciting to follow your passion and contribute to the economy, one of the most critical aspects of running a business is understanding whether or not you’re profitable.
Profitability is the cornerstone of any successful business, and knowing how to track it effectively can make or break your journey as a small business owner.
In this comprehensive guide, we’ll explore how to know if you’re profitable, offer practical examples and simple ways to track your business performance, and dive into the differences between quoting by an hourly rate versus a total project cost. By the end, you’ll have a clearer understanding of how to evaluate your business’s profitability and make strategic decisions to ensure long-term success.
What Does Profitability Mean?
In simple terms, profitability is the ability of your business to generate more revenue than it spends. Profit is the difference between your income and your expenses, and it’s often broken down into three types:
Gross Profit: The revenue left after subtracting the cost of goods sold (COGS) — for example, the costs of materials, labour, and production.
Formula: Revenue - COGS = Gross Profit
Operating Profit: This takes gross profit and subtracts operating expenses like rent, utilities, and salaries.
Formula: Gross Profit - Operating Expenses = Operating Profit
Net Profit: The final profit figure after subtracting all expenses, including taxes, interest, and one-off costs.
Formula: Revenue - Total Expenses = Net Profit
While these formulas are straightforward, the challenge lies in tracking and analysing them consistently. Let’s break down how you can determine your profitability as a small business owner in Australia.
Signs That Your Small Business Is Profitable
Before diving into metrics and tools, let’s look at some common signs that your business might already be profitable:
Your bank account balance is steadily growing over time.
You pay yourself a consistent salary and still have enough to cover business expenses.
There’s a healthy gap between your income and expenses.
You’re able to reinvest in your business (e.g., upgrading equipment, hiring staff, or marketing).
You don’t rely on personal savings to cover business costs.
However, if you’re unsure or want a more concrete way to measure profitability, let’s explore some practical methods.
How to Track Profitability: Simple Steps for Australian Small Businesses
Tracking profitability doesn’t have to be complicated. Here are some straightforward ways to monitor your business’s performance and ensure you’re on the right track.
1. Set Up a Clear Accounting System
The first step to understanding your profitability is having a reliable accounting system in place. Use accounting software like Xero, MYOB, or QuickBooks, which are popular in Australia and tailored to small business needs.
These tools can help you:
Track income and expenses in real time.
Generate profit-and-loss statements automatically.
Monitor cash flow and outstanding invoices.
For example, if you own a café in Sydney, Xero can help you track daily sales, supplier payments, and employee wages in one centralised dashboard. By regularly reviewing your financial data, you’ll know exactly where your money is going and how much you’re making.
2. Calculate Your Break-Even Point
Your break-even point is the amount of revenue your business needs to cover its expenses. Once you surpass this point, you’re making a profit. Knowing your break-even point is crucial because it sets a clear benchmark for your sales goals.
Formula: Break-Even Point = Fixed Costs ÷ (Price per Unit - Variable Costs per Unit)
For instance, a small handmade jewellery business in Melbourne might have monthly fixed costs of $2,000 (e.g., rent and utilities) and sell necklaces for $50 each, with variable costs of $20 per necklace (e.g., materials). The break-even point would be:
Break-Even Point = $2,000 ÷ ($50 - $20) = 67 units
This means you need to sell at least 67 necklaces per month to cover costs. Anything beyond that is profit.
3. Monitor Your Cash Flow
Profitability isn’t just about revenue; it’s also about having enough cash on hand to pay your bills. Cash flow issues are one of the leading causes of business failure in Australia, so it’s essential to keep a close eye on your cash inflows and outflows.
Use a cash flow statement to track money coming in and out of your business.
Identify periods of high and low cash flow (e.g., seasonal trends).
For example, a landscaping business in Brisbane may have a surge in cash flow during spring and summer but slower months in winter. By planning ahead, you can ensure you have enough reserves to cover expenses during the off-season.
4. Review Profit Margins
Your profit margin is the percentage of revenue that remains as profit after expenses. It’s a key metric to determine how efficiently you’re running your business.
Formula: Profit Margin = (Net Profit ÷ Revenue) x 100
Example: If your revenue is $10,000 and your net profit is $2,000, your profit margin is:
Profit Margin = ($2,000 ÷ $10,000) x 100 = 20%
A healthy profit margin will vary depending on your industry. For example:
Retail businesses often have lower margins (5-10%).
Service-based businesses like consulting can achieve higher margins (20-40%).
5. Track Key Performance Indicators (KPIs)
In addition to financial metrics, track other KPIs that indicate profitability, such as:
Customer acquisition cost (CAC): How much does it cost to acquire a new customer?
Lifetime value (LTV): How much revenue does a customer generate over their relationship with your business?
Inventory turnover: How quickly are you selling your products?
For instance, an online clothing store in Perth might notice that its CAC is too high due to expensive Facebook ads. By optimising their ad strategy, they can lower costs and improve profitability.
Hourly Rate vs. Total Cost Quoting: Which Is Better?
Small businesses in Australia often face the dilemma of whether to quote jobs by an hourly rate or a total project cost. Let’s compare the two approaches and their impact on profitability.
Hourly Rate Quoting: Pros and Cons
When you charge by the hour, you’re paid for the time you spend on a job. This method is common in service-based industries like consulting, graphic design, and trades.
Pros:
Transparent: Clients know exactly what they’re paying for.
Flexible: Accounts for unexpected changes or delays.
Scalable: The more hours you work, the more you earn.
Cons:
Limited earning potential: Your income is capped by the number of hours you can work.
Client objections: Some clients may hesitate if they’re unsure how much time a job will take.
Efficiency penalised: The faster you work, the less you earn.
For example, a freelance web designer charging $80/hour might spend 10 hours building a website, earning $800. However, if they become more efficient and complete the job in 8 hours, they’d only earn $640 for the same value delivered.
Total Cost Quoting: Pros and Cons
Quoting a fixed total cost means setting a price for the entire project, regardless of how long it takes. This approach is often used in construction, event planning, and creative industries.
Pros:
Predictable income: You know exactly how much you’ll earn from a job.
Client satisfaction: Clients appreciate knowing the final cost upfront.
Rewards efficiency: Completing the job faster increases your effective hourly rate.
Cons:
Risk of underquoting: If you underestimate the time or resources required, you could lose money.
Scope creep: Clients may request additional work not included in the original quote.
For instance, a builder in Adelaide might quote $15,000 for a home renovation. If the project takes 150 hours, their effective hourly rate is $100. However, if delays or unexpected issues arise, they might end up working 200 hours, reducing their rate to $75/hour.
Which Approach Is Best?
The best method depends on your industry, business model, and goals. Consider these tips:
Use hourly rates for short-term or unpredictable jobs where the time required may vary.
Use total project costs for well-defined jobs with clear deliverables.
Combine both methods: For example, quote a flat fee for the main project and an hourly rate for additional work.
Additional Tips for Boosting Profitability
Here are some extra strategies to maximise your profits as a small business owner in Australia:
Raise Prices Strategically: If you’ve built a loyal customer base, consider small price increases to improve margins. Australian customers often value quality and are willing to pay for it.
Reduce Overheads: Review your expenses regularly and identify areas to cut costs, such as renegotiating supplier contracts or switching to energy-efficient equipment.
Focus on Retention: Acquiring new customers is more expensive than retaining existing ones. Invest in loyalty programs, excellent customer service, and follow-ups to keep clients coming back.
Diversify Income Streams: Explore additional revenue sources, such as offering new products or services, selling online, or hosting workshops.
Leverage Government Support: Take advantage of Australian government grants, tax incentives, and small business programs to reduce costs and improve cash flow.
Final Thoughts
Knowing whether your small business in Australia is profitable comes down to tracking the right metrics, understanding your costs, and making informed decisions. By setting up a clear accounting system, calculating your break-even point, monitoring cash flow, and comparing pricing strategies, you’ll gain the insights needed to grow a sustainable and successful business.
Remember, profitability isn’t just about making money — it’s about using your resources wisely and creating long-term value for yourself, your customers, and your community.
Whether you’re a tradie, a café owner, or a creative entrepreneur, these strategies will help you stay on top of your finances and thrive in the competitive Australian market.
As a business owner, you have the power to shape your future. Start tracking, analysing, and optimising today — your bottom line will thank you!
If you’re ready to take your business to the next level, our team at Perfectly Organised NT is here to help.
There are many ways of working with professionals. Start small, but keep it regularly and don’t wait until something happens. Strategic planning and periodic reviews are a great start to implement those strategies.
Perfectly Organised NT can assist with a financial review and strategic business planning & management. Find out more!
Perfectly Organised NT - helping small business owners in Australia manage their business.