Where do top businesses spend their money?

Where do top businesses spend their money?

ELXR_infograph_overheads

 

When it comes to your overheads, business owners often ask us what percentage of their turnover should be spent on marketing? Or premises? Or—gulp—on business coaching?

The most annoying answer to the turnover question is always “it depends,” and it really does depend, right?

Well, yes, but as I studied some compelling benchmarking data recently, I came across some really interesting findings that helped put those turnover questions into perspective.

While the “right” answer will come down to your current capacity, the outcomes you want to achieve, and your stage of growth, this infographic shares some insights into some of the spending habits of 2,500 business around Australia.

What Does this Data Mean for Your Business?

(Hint: the money isn’t going to advertising)

This data you see above was compiled by MYP Corp—comprised from the financial statements prepared by accountants of more than 2,500 businesses around Australia.

The businesses spanned across all industry sectors and sizes (from micro to large businesses), and the data reflects financials of the 2014 financial year.

The average net profit before tax of all participants was a dismal 3.9%, so I’m most interested in the top quartile—those businesses that enjoyed an average net profit of 36.7%.

Now, I have heard many a marketing agency quote that “[Businesses] should be spending at least 5% of turnover on advertising and marketing.” And yet the top quartile spent on average 1.6% of their turnover on marketing efforts—marginally higher than the overall average of 1.5%.

Perhaps with the growth in targeted marketing opportunities and great information and education available from such generous folks as the Small Business Big Marketing podcast and Practice Paradox (shout outs to Timbo and MC Carter!); maybe people are opting to do their marketing themselves, and using clever sites like Elance, 99 Designs and fiverr to get creative?

Nowadays there are so many ways that businesses can have great marketing and build brand awareness without spending a bomb. Sorry Yellow Pages!

So Where Are Smart Business Owners Putting their Investment Dollars?

The top businesses spent an average of 3.6% on motor vehicles, which I think is really only interesting when you compare it to the 0.4% they spent on technology. Spending more on cars than technology—I’m not entirely sure what that is telling us, but it’s interesting nonetheless.

The average business spends 50% more on labour as a percentage of total revenue than their profitable peers…16.7% for the top quartile as opposed to 25.6% for the average.

Not surprisingly, they need more space to house those bums on seats—the average business spent 4.9% of turnover on rent where their top performing peers spent 3.4%.

And my favourite number…

Businesses spend up to 5% on professional fees, with the average business spending 2.3% of turnover on professional fees.

Think about that…For a business with $1 million in turnover, that’s $23,000 a year. I’m not surprised that the most profitable businesses spent 1.8% on average.

I’m going to make the dubious leap that they may have spent similar dollar figures, but the advice they received from those professionals helped them increase turnover, thereby reducing the percentage their fees represented.

Hey, this is my story, and I’m happy to find statistical proof of what we see every day.

So Think About Those Numbers…

Why do I want you to reflect on this? Two really important reasons…

  1. If you own a business, think about what you spend on professional fees for external consultants (such as the fabulous team at Elixir)…we always find that our fees result in more revenue and net profit to the business owners, as well as better overall outcomes.

If you’re not spending at least 1.8% of your total revenue, maybe you’re missing out on some external expert guidance that could bring you new insights and accountability that you just can’t get from within?

  1. If you have clients that are business owners, consider this when deciding on your service offerings. Do you have expertise that you can lend them to help them run their business better?

If you’ve been contemplating offering business advisory services to your clients, I know a fantastic framework that will empower you to add incredible value to them! It’s called the Juice Console and you can discover its wonders at elixirconsulting.com/juiceconsole.

Sue Viskovic
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Sue Viskovic CFP is the Founder of Elixir Consulting; a proud mother of four; a sought-after speaker; a business coach; and author of a number of books and programs designed for advisers. An active contributor to, and advocate of, the financial advice profession, Sue is passionate about the important role that quality advice can play in society.