Key Numbers to Drive Profit
Do you ever look at the reports from your accounting software or are they meaningless to you?
A typical set of Financial Reports contain a lot of numbers but reading them can be daunting, hiding the critical numbers to success.
So what are the key numbers you should review that will drive your profit?
Revenue Growth %
This indicator generally gets a lot of attention and rightly so. The number though should not be looked at in isolation, revenue growth is OK but profitable growth is better.
Price Change %
This is the percentage by which the price you sell products either increases or decreases. Small regular price changes are easier to implement that one large change.
Cost of Goods Sold %
Cost of goods sold is the cost to get a product or service to market before taking into account overheads. This is an important number as it drives your profitability, a small decrease in COGS can have as much impact on Gross Profit as a large increase in revenue.
We often look at our overheads but we should review them as a % of revenue. If you can increase revenue while not increasing revenue your profit will increase, likewise if your overheads increase slower than revenue you will be more profitable. If your overheads rise at the same rate as revenue, you may be working harder for no more profit
This is the number of days on average it takes your customers to pay. The lower the number the better your cash flow. If the number is growing you cash will get squeezed impacting working capital.
This is the number of days on average you take to pay suppliers. Small improvements in this area by negotiating better deals can have a huge impact on your working capital position.
This is the number of days on average your stock is sitting in the store room or show room. This ties up cash impacting your working capital, so reducing days inventory by better buying or merchandising can have a big impact on your cash and profit position.
All these numbers are available from your Financial Reports, either from the Profit & Loss or the Balance Sheet. How many of you look at your Balance Sheet each month? Considering I have spoken to numerous small business operators who don’t look at their Profit & Loss report the number is surprisingly large.
Take the time to review the Financial Performance of your business each month, it will be worth your while and will help you trade more profitably.
Small Fish Business Coaching Sydney
Monitoring Working Capital Improves Cash Flow
A recent article by VECCI (Victorian Employer’s Chamber of Commerce and Industry) quoted ASICs figures showing that nearly 10,500 businesses entered external administration in 2011. Many were small businesses and analysts suggest the higher number of insolvencies is due to a crackdown from banks and the Australian Tax Office, which are pursuing unpaid debts and tax liabilities harder than before.
Business already pushed to the limit with overdrafts and loans are stretched as far as they can and with cash dried up, they have nowhere to go but call in the administrators.
The truth is that many business owners fail to understand or know their real Working Capital requirements and therefore expand too quickly, make bad business decisions or waste money with inefficiencies. This leads to additional requirements for cash and puts pressure on an already strained cash flow.
It’s important to understand the Working Capital requirements because understanding this figure will help understand how to improve it, and therefore keep more funds in the business.
So what is working capital? In a nutshell:
[Stock you have on the shelf +Work in Progress (labour and Parts) + Raw materials + Finished Goods] plus [Money customers owe you] minus [Money you owe your suppliers and other payables (rent etc)]
A simple way to monitor your Working Capital is to work it out as a % of Annual Sales.
For example: Let’s assume we buy 6 weeks of raw materials for production. (we buy an extra 2 weeks supply “just in case we run out”)
Assume Raw materials make up 40 % of our average sales.
1.5/12 X 40% = 5%
So for every $100 of sales we make, we need $5 to pay for the raw materials alone. Doesn’t sound like much but if we turn over $1mil that’s $50,000!. If we grow to $2mil turnover its $100,000 - suddenly that’s a significant amount of money.
Now let’s get efficient and only order exactly 1 month’s raw materials.
1.0/12 X 40% = 3.3%
So in that $1mil turnover business we now only need $33,000. That’s $17,000 we no longer need to fund buying raw materials and can be used to retire debt or for something else.
Going through the Working Capital “supply chain” we can calculate for each item as a % of sales
Calculate the Working capital as % of sales and know that number off by heart! It’s one of the most important number’s you should know after your Gross Profit margin.
- Raw Materials
- Work In Progress
- Finished Product
- Trade Payables
- Other payables
An example is shown below
Here our Working capital is 27% as a % of sales. We now know that if we suddenly receive an order for $100,000 we need $27,000 of cash to fund that order. This number becomes meaningful because we can ask for a deposit, stage payments, stage supply or a raft of things so as not to chew up our cash.
Now if we can make some basic improvements in your Working Capital “supply chain” (as shown in red) and suddenly our business has only 18% working capital needs as a % of sales – and the business has nearly $100,000 of extra cash it no longer has to borrow.
Now that’s impressive.
Of course using an experienced Business Coach can help calculate your Working capital as % of annual sales for your business, identify any inefficiencies and help you reach your goals of achieving great Cash Flow.
Small Fish Business Coaching Melbourne
The Difference Between Being "Reactive" and "Proactive"
There is a big difference between being proactive and reactive in your business. Successful business owners focus on proactive. Being reactive is not only stressful and potentially expensive, it can kill your business.
Proactive business owners;
- Plan ahead – they know what the next 1, 6 and 12 months should look like.
- Have budgets – they know what their goals are in terms of sales, customer retention, average sale etc. They also plan their marketing spend and set goals for return on investment.
- Understand the financials – they don’t wait until their accountant tells them business is ok to know business is ok. They check their sales, profit & loss and balance sheet regularly.
- Focus on the business and customers they want to attract – they know who is profitable and who is not. They don’t waste valuable time and money attracting the wrong customer to their business.
Reactive business owners;
- Never plan – they are scrapping by day to day hoping they will still be in business in 6 months.
- Never set budgets – they are unsure how or why budgets are valuable or simply don’t see any benefit in having them, some are far too scared to set goals.
- Hide from the financials – they don’t understand or want to know about the financials of the business. They hope that someone else has this under control for them. They are not sure who they owe money to and worse who owes money to them!
- Take any business from anyone anytime – they are so desperate for cash they take any customer they can regardless of how profitable the work might be. They continue to work for customers that fail to pay on time. They discount prices and under quote just to get work in the door.
Do you identify with the proactive or reactive business owner? Maybe you identify with a bit of both. There is no shame in seeing your self reflected in the reactive business owner. Business can be scary; the financials alone frighten the heck out of most people. The important thing is that you do something to change. It is almost a new financial year, time for new challenges, new ideas and a fresh approach!
Small Fish Business Coaching Gold Coast
Business Coaching Winners - Yummy Mummy Day Spa
Our most recent Business Accelerator Package winner was Amy Mitchell from Yummy Mummy Pregnancy Massage and Day Spa.
We were so excited to meet Amy and the team at Yummy Mummy - who run Australia’s only pregnancy day spa! Yummy Mummy's trained therapists specialise in taking care of pregnant women right from conception, through to birth and beyond - offering treatments that have been designed by pregnant women for pregnant women!
If you are pregnant (or know someone who is), we would highly recommend contacting Yummy Mummy for some pampering and pain relief to start feeling like a Yummy Mummy once more! Did we mention that they even have gift vouchers.....
The Yummy Mummy experience is presently available in Perth, with plans to come to Sydney and Melbourne soon. Amy is in the process of working through the first stage of the Small Fish Business Coaching system, and we look forward with tremendous anticipation to see Yummy Mummy expand Australia-wide, and maybe even internationally!
Stay tuned - we will let you know how it goes!
(Note: Pictured are Gillian (seated), Shannen, Amy Mitchell, Louise and Lee)
Small Fish Business Coaching Perth
Are You "Road Blocking" Your Success in Business?
How many roadblocks do you have in your business? A roadblock is something that you use as an excuse as to why you are not getting the important stuff done. The important stuff is the money making stuff! That means getting on the phone to drum up sales or book appointments, or starting that big project that could help grow your business.
Roadblocks are dangerous and using them allows you to continually sabotage your own success by creating diversions that are not going to lead you anywhere but to exactly where you are today.
Still confused? Here is a list that I have come up with, tick off the ones you allow to block your success;
There are thousands of road blocks that small business owners use as daily self sabotage on their own business. There is rarely one that I have heard that does not have a logical and relatively easy answer.
- My office is messy – I need time to sort it before I do anything else
- I don’t have my database set up properly so there is no point in calling anyone
- My staff are constantly interrupting me so I never get anything done
- Our sales material is out of date so I won’t call anyone
- I have too many small jobs such as data entry or filing to move on to larger projects
- I spend all day checking and answer emails, there is no time for anything else
- I have to get through my never ending “to do” list first
- The phone is always ringing with people needing my attention
- I don’t have enough hours to get to the big stuff
Be honest! How many are you guilty of? How many “urgent” tasks do you allow yourself to get sucked into to avoid doing the “important” stuff?
Small Fish Business Coaching Gold Coast
Energy Sucking Black Holes in Business
I meet a wonderfully wide range of people in a typical week, and this one has been no exception. Despite the huge differences, a common theme has been emerging – the phenomenon of Energy Sucking Black Holes. We all have things we know we should do, but haven’t acutally done yet. There is a variety of reasons for this – we’re busy doing other things, the job is not something we enjoy doing or the project is just too big and scary to even think about. Sounding familiar?
So this job sits on the ‘to do’ list… glaring at you! It starts to haunt you – it interupts your sleep and invades your private moments of solitude and reflection. It begins to take on a life of its own. As a consequence, whatever the reason you haven’t got around to doing this thing seems to become more real also – if the job was scary yesterday, its terrifying today! If you might have found 5 minutes to make a start on it yesterday, there’s no way you can do that today… you're just too busy!!!
You know the job is important, or else you would have crossed it off your ‘to do’ list days ago. Bad things will happen if it doesn’t get done. That makes you afraid. Fear breed paralysis. And saps your energy. Before you know it… you’ve created an Energy Sucking Black Hole. To an outsider, they’re easy to spot. The person your talking to is distracted. They’ve got 100 good reasons why the job hasn’t been done yet. They are busy doing other stuff. But you can see the energy being drained and performance drops. The spiral is self-perpetuating.
STOP! Step outside yourself for a moment, stand next to me and look at the situation as an outsider. We don’t have the emotional baggage, things are much clearer from out here. How to tackle this sucker? Here’s a few techniques to get you started.
Forget an A+, you just need a ‘Pass’. Perfectionists often set themselves very high standards. Often, this is a good thing. But not when it makes the bar so high you’ll never get over it. Aim to get the job done… just done. Nothing fancy, just finished. There is more good in a project finished to a reasonable level than the best project in the world never getting off the ground.
Take a different approach. If the idea of walking into your office, turning on your PC and writing that report fills you with dread, don’t do it. Put on a Hawiian shirt, grab the laptop and find yourself at a table at that cool café on the beach. Or take some fancy note paper and a purple fountain pen. We’re after a result here, it doesn’t matter how it gets done.
We all know how to eat an elephant. One bite at a time. So make your first step breaking this huge, scary monster of a project down into cute little bite sized pieces.
Step 1. Write your plan. Make a fancy title page. Turn off the PC and celebrate the completion of Step 1 with a nice glass of wine. Just make sure you come back for a similarly easy Step 2 tomorrow.
Sorting out your filing cabinet, writing your marketing plan or making an appointment with your bookkeeper can be daunting, but the pain of dealing with an Energy Sucking Black Hole is far worse. Go on… just do it!
Small Fish Business Coaching Canberra
Economic Disaster My Arse, We'll Be OK
Seth Godin recommended his book, I just watched it on TED (there's a theme here, isn't there?) and it involves a discussion of abundance, which we state as one of our values - we come from a mentality that there's there's enough to go around so we'll share and be generous and we won't feel impoverished if we give stuff away.
Peter Diamandis (Abundance is our Future) talks about how the new and emerging technologies and the population shifts and other factors actually make it likely that we won't all collapse in a heap but that we'll overcome our hurdles and have a fun next decade.
In particular, this applies to our economy (watch for it, it's near the end) - there are some billions of people emerging from the third world into the information world and they'll be our consumers - there will be a huge fill up to the global economy, enough to counteract the global crisis that's with us now. So don't despair.
Watch the video here. It is quite interesting.
Small Fish Business Coaching Northern Rivers