Know Your Numbers – Make Better Business Decisions
All of the information you need to make decisions for your business can be found in your numbers.
Want to know where to spend your marketing dollars? Your numbers can tell you. Thinking about streamlining and dropping some products or segments? Look to your numbers to discover which ones to let go. Considering increasing your prices, or investing in new equipment and wondering what the impact on cash flow or profit will be? Your numbers can tell you the impact on cash flow and profit.
Business is about making decisions. The right decisions.
Are you paying attention to your numbers? Because I find most small business owners aren’t. Year-end financial statements are very valuable to the small business owner because without them, they’re never going to get a loan. Financial statements and tax returns are the first thing a banker will ask of a small business and most small business owners know by now that without them, they’re never going to get any money from the bank. But, in terms of providing financial information, financial statements are pretty useless.
The key thing with a lot of small business owners is that they don’t run their business by numbers, they run their business with what I refer to as instinct or touch. A lot of small business owners touch on everything in their business, from the quote, to the invoice, to getting the job done, to checking the invoices from suppliers; they basically touch everything in the business. Whilst that’s fine when the business is small, as it grows it’s not an ideal way to manage the business. As the business grows systems need to be developed and put in place to manage the business, otherwise the business becomes a bit of a free-for-all. If you look at successful businesses and organisations, you will find most of them go on the adage:
Whatever you can measure, you can manage
A successful business or organisation understands they may not be able to achieve 100 percent improvement in one thing to give them a major competitive advantage, but if they can do one hundred things 1 percent better, you can improve your business. If you’ve got better information, you can make better decisions.
A client of SP Solutions wasn’t achieving the gross margins or profitability that we had targeted for them to achieve. We looked at it closely and put it down to their pricing. They insisted it wasn’t a pricing issue, as they were inputting their costs and the margin into computer software they had recently purchased. We took an even closer look, entering their gross margin target into the software, but they were including a markup when entering the information. There was a big difference between the margin and the markup so their profitability was low. It doesn’t matter how good computer software is, if you put garbage in, you will get garbage out.
The key thing is not to run your business blind; you’ve got to know the numbers in your business. One of the important numbers you need to know is your business’ breakeven point. This is the point where your business is not making money but it’s also not losing money, hence why it’s called breakeven. Small business owners should know what their breakeven is per day, per week, per month and per year. It’s important to have a good idea of what point you start to make money and profit in your business and at what point you’re recovering costs in your business.
Know your breakeven
In advising another client of SP Solutions that was just starting out we developed three breakeven points in his business.
The first breakeven point addressed the overhead expenses to create what we call a minimum salary. This is the minimum salary he needed for his business to survive.
The second breakeven point was the point where he covered his overhead expenses and paid himself a market salary. This is the market salary he would be on if he were to work for somebody else, in this instance, $100K and worked out the pricing as if he were getting paid that market salary per year. It is essential to base your pricing on market salaries, because if you base your pricing on minimum salaries the only way you can grow your business is to employ people that are willing to work for less than the market salary. Price as if you have a market salary even though you don’t pay yourself one and the extra profit will be used in the business to build up the working capital (what I call ‘sweat equity’).
The third breakeven point is what will cover the everyday expenses, the market salary and bring a return on our investment; a return on the funds we’ve invested in the business and a target return on the turnover that we’re doing in the business.
The better you know what those targets are and then use them as a benchmark to figure out what other top profitable firms in your industry are doing, that’s what’s going to put you on the right track to develop a profitable business.
I challenge everybody not to be a labor hire business. Be a business that’s going to be profitable, be a business that makes profits and understand that your breakeven will change all the time and that it’s something you’ll always want to look at. So, come to know your numbers and make some better business decisions!
Need help in getting to know your numbers? Contact SP Solutions to speak to one of our experienced business advisors.