‘Every piece of information you need to make decisions regarding your business can be found in your numbers’
Want to know where to spend your marketing dollars? Yours numbers can tell you. Thinking about streamlining and dropping some products or segments? Listen to your numbers to discover which ones to let go. Thinking of increasing your prices, or investing in new equipment and 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.
Episode 3 transcipt is available to download below…
SAM: Hi! This is Sam Polimeni and this is Sam’s Soapbox. Your numbers are screaming at you, are you listening? Your numbers are trying to tell you something about your business. I find most small business owners just aren’t listening. The problem is year-end financial statements; they’re very valuable to the small business owner because without them, you’re never going to get a loan. The first thing a banker asks a small business owner is “where’s your financial statements and tax returns?” Most small business owners know by now, 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.
If your business isn’t going that well, chances are, you’ve just blown the best part of another year before you can try to correct it. And I think the key thing with a lot of small business owners is that they don’t run their business by numbers because they run their business with what I call instinct or touch. And the reason why small business owners do that is because they touch 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. And whilst that’s fine when your business is small, as it gets bigger, that’s just not a great way to manage your business. So, what tends to happen is as the business grows, if they hadn’t developed a system to manage their business, basically the business is a bit of a free-for-all. What I find is if you have looked at successful businesses in business and other successful organizations, you’ll find most of them go on the adage whatever you can measure, you can manage.
Let’s take AFL football for example. Today, they’re measuring everything! From footballers running around, to the blue vests on in pre-season, measuring how many K’s they’ve travelled, to what their heart rate is, what their blood pressure is, and all these other things that measure everything. They’re measuring all these KPI’s in football from inside 50’s to tackles to all these other various things. A successful business understands or a successful organization understands. You may not be able to get 100 percent improvement in one thing that’s going to give you major competitive advantage. But if you can do a hundred things 1 percent better, you’ve got basically want to improve your business, right? I find if you’ve got better information, you can make better decisions.
A few years ago, we had a client who ran a window manufacturing business and the profitability in the business just wasn’t right. We kept on talking to the clients and looking at their numbers: they just weren’t achieving the gross margins that we expected. We started to look closely at it and we said “your pricings just got to be wrong!”
“No, it’s not wrong because we’re putting the pricing in this computer system that we bought, we put in all our costs, we put the margin, and basically it comes up with the price.” For a little while they argued with us that they couldn’t be wrong. We had a closer look at it we were giving them a gross margin target but they would put in a markup in the computer system.
There’s a big difference between the margin and the markup hence their profitability was low. It doesn’t matter how good computer systems are, if you put garbage in, you’re going to get garbage out. My key thing is don’t run your business blind; you’ve got to know your numbers in your business. And one of the key numbers you need to know in your business is your breakeven point. Your breakeven point in your business is the point where you’re not making money but you’re not losing money, hence it’s called breakeven. Most small business owners should know what their breakeven is per day, per week, per month and per year. You should have a good idea at what point you start to make money and profit in your business and at what point you’re recovering your costs in your business.
Now, I have a client who a few years ago started an architectural business. I said to him, “What we need to do is we need to develop 3 breakeven points in your business. And we’ve got to get your costing right.” So one of the first things we did was to get to the first breakeven point where the overhead expenses create what we call a minimum salary. What’s the minimum salary you need for your business to survive?
The second breakeven point we have to get to is the point where you cover your overhead expenses and pay yourself a market salary. I said to Joe, “What’s the market salary that you would be on if you work for somebody else?” And he said about a hundred grand a year (back then). So what we did was we worked out our pricing as if you’re getting paid the market salary of a hundred grand a year. You should always base your pricing on market salaries. Because if you don’t base your pricing on market salaries and you do base your pricing on minimum salaries, what will happen is your business will get stuck, right?
You’ve got to pay yourself a market salary because if you don’t pay yourself a market salary, the only way you can grow your business is go employ other people that want to work for less than the market salary. I don’t know about you, but that is just really hard to do, right? Just about impossible to do. You always have to price as if you have a market salary even though you don’t pay yourself one, the extra profit will be used in the business to build up the working capital (it’s what I call ‘sweat equity’).
The third breakeven point to target is what’s going to cover our everyday expenses plus our market salary plus getting 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.
We need to know what that third breakeven point is. Best to know what your targets are then use a bit of 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 breaking even will change all the time, that’s something you’ll always want to look at. So go know your numbers and go make some better decisions.
OUTRO: That was another episode of Sam’s Soapbox. If you’d like Sam to advise you on how to grow your business into a multi-million dollar consume that’s far less reliant on you, then call in (03) 9355 0500 or visit www.sampolimeni.com