Azure Group survey shows half of SMEs are dissatisfied with their profits

Results of our recent survey on how Australian small and medium sized enterprises are managing their finances show despite moderate growth from the previous financial year, 50 per cent are disappointed with the profitability of their business.

Azure Group managing director, Michael Derin said, “The survey highlights while most SMEs are focused on increasing their revenue, many are not considering how this revenue is translating into profits, resulting in a return which is often below expectations.

“As most SME owners rely on profit distribution for their personal wealth, it is vital the business is profitable for them to earn a living,” Derin added.

One aspect the survey uncovered that is leading to reduced profits is many SMEs are not budgeting effectively. Only 18 per cent have a long term view to budgeting and 40 per cent do not track actual figures against budgeted figures each month.

“To be effective a budget should be for three years in advance so you have a long term view of performance. It’s also crucial to be reviewing and comparing your actual results against budgeted figures each month to keep the business on track to achieve its targets.

“We also found many SMEs don’t fully know where they stand financially with one-third not producing a monthly balance sheet or cash flow report and 40 per cent not totally confident their financial figures are accurate. This is alarming, as having inaccurate financial information makes it nearly impossible to manage cash flows, tax obligations or understand what areas of the business are profitable and what your profit margins are,” said Derin.

Derin explains that when market conditions falter many businesses adopt an ‘increase sales at whatever cost’ mentality. This leads them to heavily discount or operate on a razor thin margin that on the surface may look like things are going well when in reality they are compromising their profitability.

“Recent outlooks suggest that market conditions will remain challenging for some time so my advice to SMEs is look at how they can maximise their gross profit and their margins. Often this means focusing on what the business does best and the areas delivering the highest profits back to the business.

“To do this SMEs must ensure their financial information is up-to-date and accurate, be producing and reviewing their monthly reports, including a profit and loss statement, balance sheet and cash flow report, and having a good understanding of what their gross profits are for their different products. In many cases I’ve advised clients to discontinue certain services or products if it’s costing them too much to deliver,” added Derin.

This is the second year Azure Group has conducted its SME benchmarking survey so it can gain a better understanding of how Australian small and medium sized businesses manage their finances. The survey looked at how they managed their reporting, cash, finance people, tax, budgets, key performance indicators and profitability.

View the full report

Key insights from the survey:

• 63% increased in turnover, 75% with growth up to 30% 
• 40% are not totally confident their financial figures are accurate
• Nearly 20% are lucky enough if they have enough cash to cover wages
• 75% are not always collecting payment from debtors on time
• 50% will not engage an external consultant in the next 12 months
• 35% did not do tax planning for the 2011 financial year
• 50% are dissatisfied with their financial return
• 69% budget for only one year in advance
• 40% are not tracking actual figures against budgeted figures each month
• 75% do not track the effectiveness of KPIs in a monthly report.