I want to share with you THE most common consistent problem I strike behind most small business management performance – THEY DON’T KNOW THEIR NUMBERS!
Plus, and even worse, no one has ever spent the time to explain why it is important. SOUND FAMILIAR!?
Yes, many business owners have weaknesses in marketing, HR, management skills, and leadership skills, but all of these should be worked on after you know the goals you aspire to achieve and how to get there financially. Otherwise, why get out of bed?
The initial reaction I get when asking this is an eye-roll and being told they ‘know their figures’, e.g.:
Hourly charge-out rate
Their wages and costs
Stock levels (hopefully)
Base supply costs, and so on
But usually they have no idea about the following:
Don’t know what profit goal they NEED
Don’t know what level of sales they NEED to achieve the profit they WANT
Don’t know their Gross Profit (often confused with Mark-up) after all productive costs
Finally, Don’t know if their idea is even possible – ‘What barrier is the biggest to achieve this? (and no, it's NOT Marketing)
So, let’s spend some time delving into this (I promise you don’t need to be an accountant!)
Profit Goal - Common-Sense
Firstly, if you tell me you want to make $50,000 - $75,000 per annum profit before your own remuneration, and I will show you the door and give you directions to the nearest employment agency.
Any small business must be ASPIRING (sometimes a bad year accepted), to make twice what their team are earning, otherwise, why bother?!
Being told ‘It’s a lifestyle!’ and ‘Be Your Own Boss’ is a complete COP OUT told to them by their ‘BBQ Advisor’ friends or someone selling the business to them.
Your responsibility to yourself as a business owner is to make a profit to reward you for risk and then to ensure your valuable team has secure employment and a healthy growing environment.
For the purpose of this article, a profit TARGET for a small business owner should be consistently $100,000 p.a. and growing.
Secondly, what is your ‘WHY’ for the profit? To repay your $400,000 mortgage in 10 years? If so, this requires a tax-paid profit of $40,000 p.a. on average to reduce and AFTER you have paid all other personal costs like school fees, food and health insurance.
Plus, the business has to have funded its own growth by paying tax and funding debt repayments, and such.
Why is this important? Because money alone will not motivate your goals being achieved long-term, someone driven to repay their mortgage will be CONSISTENTLY working on the business than someone just wanting to earn $100,000 on a cold winter’s morning.
Why do so many corporate-executive-type personnel leave their ‘comfortable’ jobs and go into small business ventures? Because often they were not fulfilled by money alone; something was calling them to aspire to more fulfillment.
Your goals for the profit are PERSONAL TO YOU, so choose wisely and ALWAYS keep reviewing whether it is still relevant. For example:
Halfway through the above 10-year mortgage target timeline, YOU might be paying for aged-parent welfare to help top them up
As well as repaying the mortgage as desired
As a result, this figure now has to increase!
What level of sales is needed for this profit?
We don’t know yet, but we better find out soon! Otherwise, you’ll be disillusioned and unmotivated – maybe not in the short term, but within the decade, you’ll find money alone does not motivate.
So, let's play a little… to know the profit goal, you next need a Sales Trigger Target, as without sufficient sales being known, no goals will be achieved with certainty.
Here is a table (‘Sales Mountain’) to use based on the following KPI’s as an example:
Existing profit (owners’ remuneration) = $75,000
Target additional profit = $50,000 ($25,000 for improved owner remuneration / $25,000 to retire personal debt faster)
Overhead costs e.g. non-direct expenses (if you don’t know this, contact us ASAP!) = $250,000
Gross Profit Margin AFTER Operational Wages (i.e. staff who are charged out or crucial in generating the actual sales/income) – say, 29%
Your ‘Sales Mountain’ is:
Input your Profit Target inclusive of your annual tangible goal: $50,000 (e.g. base income, holiday, car, lump sum debt, house deposit etc.)
Input your desired/normal annual salary/drawings/wage: $75,000
Input your total overheads p.a.: $250,000 (i.e. excluding chargeable personnel costs)
Total to cover from Gross Profit: $375,000
Divided by your gross profit margin for year AFTER Productive Wages: 29.0%
Result: Your Sales Goal Peak is $1,293,103 (A)
Against last year’s Sales - say (or average) $975,000 (B)
Distance to the Sales Peak: $318,103 (A-B = C)
So for this example, to achieve the desired additional profit of $50,000, the Sales have to increase to $1.293M or an increase of $318k.
Then, focused questions kick in:
Is there production capacity now to achieve this?
Do we have the potential recruitment capability?
Where does this new business potentially come from?
Can we attract additional Sales with the current economic conditions?
What marketing strategies are required to drive the leads necessary?
How many leads do we need based on historic sale conversion rates?
What possible cashflow implications could this have?
Gross Profit: What is that?
Typically, this is the surplus of the sale you have received after paying for the goods (e.g. buy a unit for $50, sell it for $100, retain $50 profit) i.e. Gross Profit.
This article is not intended to re-educate you on the finer points of Gross Profit and Mark-Up (plenty is written elsewhere online), but more on how to use this knowledge to your advantage.
If you struggle with understanding Gross Profit, then contact us and we’ll schedule a training session with you, and ensure you end the day with a solid understanding of this.
However, for the purposes of planning a quick understanding of how the level of sales need to be assessed to see if this is credible, it is imperative you include your staff that are paid to generate the turnover, as simply doubling your sales to achieve your target profit is too simplistic without understanding the level of additional personnel you will need to employ to generate this turnover.
NOTE: Additional staffing for this Sales increase excludes administration staff, they will be included in a prudent % of Turnover for overheads increasing. A more detailed budget process can define this at a later stage.
What is the BIGGEST Barrier to Success Today?
We are not saying other challenges don’t exist but most are things you can quickly influence, like marketing, finance and systems.
If growing your business requires more personnel, then locating the right number of people with the right skills is becoming incredibly challenging in this modern market – particularly in NZ.
So in the example we have been using we see as follow:
We have calculated your Sales Mountain Distance to climb and it is $318,103.
Based on last year's turnover of $975,000 and divided by the average Full-Time Equivalent (FTE) @ 7 (assumed for this example) = $139,286 average sales per FTE.
When we divide the sales GAP of $318,108 by this average sale per FTE $139,286, it means we need to secure an additional 2.3 new team members to help generate this additional turnover.
NOTE - This additional 2.3 FTE should be achievable but, in some industries, it may be nearly impossible due to location or competitive pressures for recruitment of skilled labor. In others, it may be highly feasible (e.g. hospitality or retail).
Alternatively, by increasing the GP% by 3% to 32% (e.g. raising prices), you may need (in this case) only 1.4 additional FTE to achieve the Sales GAP/Profit Goals.
So, what is the answer to my question: what is the biggest barrier nowadays for a growing small business in NZ? ANSWER: It is finding suitable number of personnel to help you grow the business.
Remember I am not saying this is the *ONLY* barrier, just the main one that we see in all client operations.
So we have endeavored to demonstrate a quick and easy way to assess your goals and how achievable they are by helping you understand your numbers that are relevant to you.
By doing this we have asked you to achieve the following before you undertake 2019/2020 annual budget processes:
Get to know your numbers and how they affect your goals.
Set clear personal goals that you require the business to help you achieve.
Then see how and if your business can ever achieve this target.
Once you know it can, the next step is Marketing and growing the business with a clear plan in place – Business Plan time!
Stuck and know you still need help? Give us a call (03 479 3897) or email (firstname.lastname@example.org).
Contact us if you would like a simple tool to download to enable you to undertake this process by emailing email@example.com