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This podcast is for small to medium business owners. You've got a lot to gain, a lot to lose, and business is tough; there's a lot at stake. Business acumen is what every business owner needs, it will make a profound difference to your business.
This podcast will cover marketing, positioning, branding, lead generation, selling, negotiating, customer service, managing staff, managing finances and accounts and much more.
https://www.businessveteran.com.au/
mark@businessveteran.com.au
Are you working incredibly hard but not seeing a proper return for all your effort? This is really common in small to medium business. Even worse is when you come back from the accountant who has done your tax return for the previous financial year to find out that in fact you made a loss. Plenty of businesses have come to me in this position. They often have loans with large balances to cover previous trading losses that they have not yet paid off. Often there is debt to the ATO as well.
many years ago when I ran my IT business, my dad did the bookkeeping for me retirement thing. To be honest, I was pretty slack about regularly monitoring my finances. I was happy to delegate, in reality I had abdicated, the job of looking after the books. One day he came over to my desk and grumbled "you're losing money, you need to do something about it", and wander off back home. I remember feeling mildly irritated, I just wanted to get on with doing the work and serving the customers.
But there was no denying the reality, I really had to do something. Losing money is a horrible feeling, and its not sustainable. So I built a small business model, a little spreadsheet, into which I fed hourly rates, the number of staff we had, the number of hours they were charging to customers, and the non-wage overheads such as rent, vehicles, computers etc. It became completely obvious that I wasn't charging enough. I could see that I was losing money with every hour.
So I needed to increase my hourly charge rates to my customers. Now have a think about this for a moment. If I didn't absolutely know that I was losing money with every hour, then how likely would I have been to have that difficult conversation with the customer? And would I have resolutely stood my ground when the customer pushed back? I've gotta tell you, the conversation is a whole lot easier when you're confident
The two lessons that I learned were that firstly, you need timely and reliable information to know whether or not you are making a profit, and secondly you need to know with certainty exactly how much you need to charge, how many hours you need to bill, how many widgets you need to sell, or however your business works, to make a profit.
I increased my rates, went from losses into profit, and the rest as they say is history. I updated this model probably less often than I should have, but I did it and became, over the years, far more of a zealot when it came to tracking the numbers. In fact in the end I was tracking numbers weekly and sharing them with the whole management team and the results were extraordinary, but that's another topic.
Now the solution isn't always to charge more, although anyone who knows me knows that I'm a big fan of it, there are plenty more levers in the business you have control over. The point that I am making today is that you need to know in a timely manner whether or not you are making money, and you need to know this with the level of certainty. Why? Because change is often irksome and difficult, so you really need to know why you're doing it. If we don't know that you're not making money, we all tend to just keep doing what we're doing. It's a bit of a psychology thing. But it's real, and it's powerful.
So what do I mean by a timely manner? Well at the very least you need to be looking at your accounts monthly. However if you suspect you are losing money, a month is a long time. I would suggest weekly is far more appropriate, or even daily. There are two reasons for this. The obvious one is that the sooner you take action, the sooner you stop the loss and or start making a profit. But the other reason and it's more subtle and in some ways more powerful, is that recent information drives you to take action. If you found out that you were making a loss more than a year ago, it doesn't have anywhere near the same end effect - you can just hope that things are better now.
Just how do you track your profitability on such a short time scale? We all know that expenses are highly variable, wages are perhaps every fortnight, insurance might only be annual, rent might be monthly and so on. Here's a good trick - what you do is you work out your expenses for a year and then divide by the number of trading days in the year. For example if you only trade on normal business days, then that's about 250 days. If you close for two weeks over Christmas, then perhaps work on 240 days. Now you have an estimate of your cost per day to break even. I suggest you add at least 10% as a safety margin.
The next issue is income. Unless you have lots of transactions per day, your income is highly lumpy. You may work on a project or a product for many weeks before you finally invoice for it. There are ways to handle this situation as well. You will need to keep timesheets - I know everybody hates timesheets but if you are employing people you are essentially buying people's time. You need to know how it is being spent so you can understand your costs. That time needs to be allocated to the jobs they're working on and you need to have worked out the cost of those hours. Now on a daily basis you know how much you have spent and you know how much closer you are to completing the job, so you have an estimate of work in progress known as WIP.
Yes there is uncertainty, however over time you will refine your techniques and your numbers so that you really can estimate your profit daily.
The other situation which could make daily profit tracking difficult is where your business has highly variable sales. The answer here is to not only look at your daily profit, but also accumulate a month to date figure so you can see the unders and overs adding up to hopefully, a profit.
One final tip is that you get what you aim at. So if you are closely tracking your break even point, you risk achieving break even or maybe slightly less. Why don't you add a profit margin onto those cost figures you come up with and aim at this higher figure. Hopefully you overshoot your target and make plenty of profit, but in the event did you hit it, at least you're making a profit.
It's very easy to lose money in business and it's very hard to make money, so you need to be planning a good profit margin to be able to absorb those losses without going under.