By Sue Hirst
To call what we’re experiencing now ‘changing times’, is an understatement. Business owners/ managers have an incredible amount of flux to deal with, including – regulatory environment staff issues, global economics, technology, demographics, currency, consumer and business confidence, and the list goes on.
Some of the above may not have a direct or immediate impact on all businesses, but some of them will have an eventual impact on all. If you take a long-term view and want to build a sustainable business with capacity to grow, my top tips are as follows:
1. Know your ‘break-even’ point
This is the amount of sales you need to make each period to cover costs and overheads. For example, if your variable costs are 60 percent and your fixed monthly overheads are $50,000, your break-even sales figure is $125,000.
Example:
Sales $125,000
Costs at 60 percent $75,000
Gross profit $50,000
Overheads $ 50,000
Profit/loss nil
Once you know the magic figure of $125,000, you can break it down by week, division, salesperson etc. Everyone is clear of their targets. Obviously break-even isn’t the goal for most businesses, but it’s a great start to avoiding losses.
2. Understand your costs
Before you can work out a price for a product/ service, it’s vital to know what it costs to produce. In a ‘service’ business this includes labour and materials. Good productivity is key to keeping labour cost percentage down, compared to sale price. Every dollar or percentage of costs saved goes straight onto your bottom line. Unlike extra sales, which can lead to a very small percentage for example, five percent onto your bottom line. In a competitive environment this might be your only way to maintain profit.
3. Maximise variable costs and minimise fixed costs
To cope with flux and uncertainty you need to be able to quickly ramp up and down resources required to deliver your product or service. If you’ve got a dead certainty in terms of contracts and future sales, then fantastic. If not you need to guard against lean times. It’s tempting when times are good, to take on debt and more staff. It’s also valuable to be realistic and consider what overheads you can sustain, if sales drop periodically. For example, you may be better off to contract labour, rather than employing people. You may be better off to sub-lease space short term, rather than signing up for a three year lease.
4. Closely manage KPIs (Key Performance Indicators)
One of the most important KPIs is future orders/sales. What drives them is generally marketing and sales related. A few KPIs impacting sales are:
- Number of customer enquiries
- Cost per enquiry
- Sales conversion rate i.e. if you get 100 leads and convert 30, that’s a 30 percent conversion rate
- Average sale amount
These are important KPIs, because if you know how many leads, sales conversion rate and average sale amount, this enables you to reasonably predict future sales/orders. Knowing the cost per enquiry provides a benchmark for comparing various marketing methods.
5. Have a budget and cash flow
Being in business without a budget and cash flow is like going on a long trip without a GPS or roadmap. If you don’t have a plan for desired results, how will you know how you’re going? It’s vital, to compare monthly actual results against a budgeted target. It enables corrective action quickly, rather than waiting until the end of the year, or later, for your tax accountant to report you made a loss. Cash flow is even more vital, because running out of cash in business is deadly. It’s like blood flowing through the veins of the business. A simple cash flow forecast will help you to plan for what’s ahead. It helps you to see seasonality and how to allow for it. You can do it simply on a spreadsheet, or use some of the fantastic cost effective ‘cloud’ tools available.
6. Break down profitability by product/service
Most businesses sell more than one type of product or service. They combine to make up overall profit or loss. In order to maximize profit, you want to know which are the most and least profitable items. It’s easy to do this with a well set up bookkeeping/ accounting system. Sales often get lumped into one account, making it difficult to analyse detailed profitability. Set up a number of sales accounts and corresponding cost accounts, so you will be able to measure gross profit of each. Where jobs are concerned it’s vital to know if you made a profit or loss, to enable future improvement. There are ‘cloud’ systems available at a fraction of previous cost.
7. Run ‘what if’ scenarios
When you do your budget, do more than one. Do an optimistic one and a pessimistic one as well the ‘most likely’ scenario. That way you can monitor trends in your business to see how things are panning out and what situation you’re likely facing and plan how to deal with it.
CFO On-Call is a team of financial and business advisors who work with open-minded people, committed to business growth and achieving success.
www.CFOonCall.co.nz
