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Optimum Professional Services are delighted to launch the new monthly conversational series, “Optimum: LIVE!” which will provide the opportunity for you to hear from members of the Optimum team and special guests each month as they delve into a variety of subjects in light-hearted, fire-side chat style productions.
Each episode will be shot or broadcast live (yep! One take!) which means that it is not scripted or edited and has a more natural and engaging tone.
This is a https://www.visual-pr.co.uk production
00:00:00:04 - 00:00:18:28
Chris
Welcome back to Optimum Live episode 27. This one's titled Why Your Business can fail busy yet not making money.
00:00:19:00 - 00:00:37:10
Chris
So welcome back to episode 27 of Optimum Live. Really interested with this one. As a business owner myself, because it resonated with me, it can very often feel we're flat out. We're working incredibly hard, but it doesn't always translate to profitability.
00:00:37:13 - 00:00:38:13
Hannah
Well that's right.
00:00:38:15 - 00:00:50:09
Chris
And just quickly, the point I'm going to say that summed it up for me is when people turn to me, oh, how's it going? Really busy. And the response I always get is that's got to be good. It isn't always, is it?
00:00:50:12 - 00:01:12:17
Hannah
No. And I think that's what some, some clients can struggle with is that you go to them and you say, oh, you've had a profitable year or so far. Year today. Turnover is up. And they say, well, where's the cash though? And that's why these metrics are really, really important to give you a holistic view and to piece all that together in order to watch, to be what you want to be.
00:01:12:24 - 00:01:27:00
Chris
And, I get the impression this is both from. So I don't know whether both is the right word. Let me see how many I count up now. Planning and analyzing. So the before and the after. Really? Well, I guess the before. During and after, isn't it?
00:01:27:00 - 00:01:46:15
Hannah
Yeah, it's about planning. It's about setting those goals in the first instance, you have a strategy, then you want the monitoring piece in the middle. And then you don't want to just get, okay, this is my this is my angle a strategy is rolling. Yeah. So and that I think is what business is about because we're dynamic we pivot.
00:01:46:17 - 00:01:53:12
Hannah
It's always ever changing. So that monitoring piece in the middle is really really important. So you can make decisions quickly.
00:01:53:12 - 00:02:15:04
Chris
But effectively I know I can't remember who it was now, but I was chatting to a really successful business owner in the last week or two and, and us on the outside of there, seeing how successful they are be and they genuinely are. But he openly said, we've pivoted three times in the last two years and that's not a bad thing.
00:02:15:04 - 00:02:40:09
Chris
That's a good thing. And that's actually why they're so successful. And that's coming from having that, you know, holistic view to know all that work. And that's not what was it two episodes ago of optimum live with with Mike. And we were talking about that, between Christmas and New Year where as business owners sit there with a drink in hand and analyze what's been good, what hasn't, well, you can only do that with the information at hand.
00:02:40:11 - 00:02:41:00
Chris
Yeah.
00:02:41:03 - 00:03:12:03
Hannah
And for SMEs in particular, the, the, the additional, limitation that we're up against is resource. And by that I mean time. So especially for a lot smaller entities, a lot of it it's an owner managed business. Right. So you only have so much time to complete the planning because you're also going out and winning the work. You're also then managing the workforce, the systems, the processes, you know, pivoting for any other external factors that may have presented themselves or at the ugly head.
00:03:12:03 - 00:03:13:15
Chris
And that one will be, yeah.
00:03:13:22 - 00:03:22:20
Hannah
Yeah. And that's hard. It's hard to prioritize it. So tools to use whilst you're doing this monitoring piece in the middle. Also very important to save time.
00:03:22:23 - 00:03:41:25
Chris
It really is. And again that resonated with me because it could be as simple as a conversation with someone else makes you have that epiphany moment, which could be a good thing, could be an exciting thing. Or you guys go believe when we talk to you about it. Whichever way round it goes. Not just negatives, that goes, that's not working.
00:03:41:25 - 00:03:51:16
Chris
It's either or. I love the fact that you brought this down to four key metrics that will give me, as a business owner, the bigger picture.
00:03:51:18 - 00:04:16:12
Hannah
Yeah, these are core. So the core metrics I'd say any business should be looking at. And then in order to tailor it to your business, you may have 1 or 2 others for SMEs. Any more than that, it actually becomes very, very onerous. Unless you're looking at other specific areas like, you know, the return on investment or marketing or whatever, we won't talk about that today here.
00:04:16:12 - 00:04:24:12
Hannah
We're talking about literally the backbones. You know what what what's the nucleus? What's the driver that drives all of the other activities in the business?
00:04:24:14 - 00:04:40:28
Chris
Yeah, I mean, here in you saying about sort of getting more detailed, that's got to be when you're a bigger company and you've got experts in those areas that are on board, you know, whether it's the CFO or whatever it might be. And it's like, well, that's what they get to do is an SMB. It's all on me.
00:04:41:03 - 00:04:46:06
Hannah
Yeah. And they have much more, a much more significant investment in software too.
00:04:46:08 - 00:04:46:26
Chris
Of course, much.
00:04:46:26 - 00:04:53:11
Hannah
More bespoke, much more. And then, as you say, the people to man, not the people. So two very, very different beasts.
00:04:53:13 - 00:05:17:03
Chris
Before we move on to the metrics, then when we're talking about us as business owners in SMEs in particular, you know, we're in a whole load of hats, and very little time once we're wearing all them all, it can also become very difficult to understand what I'm seeing. That's one as well. But we're about to talk about these four metrics that we look at.
00:05:17:09 - 00:05:29:27
Chris
But that's where working with you guys at optimum becomes really useful, because you can interpret what we're looking at. What does it mean? What does it it it gives us an idea of where we could go.
00:05:30:01 - 00:05:57:15
Hannah
Yeah, I think the historically certainly where I grew up in accounting firms, you tended to have a year end meeting. So you speak after the year. And, I think more forward thinking accountants now are insisting on a prior year and meeting. But let's take it one step further, which is what we try. Often when a client comes to you or a prospective sorry comes to you and they say, I'm looking for a new accountant, we always go through the first bit of, okay, what are the pain points?
00:05:57:15 - 00:06:14:07
Hannah
And they say, oh well, Joe, but I didn't do this, you didn't write that, blah blah blah blah blah. But actually we get to the crux of what they're saying that they that they want, that they need. But actually there's a big difference between what they want and what they need. So in those discussions, we do a whole lot of listening.
00:06:14:10 - 00:06:38:10
Hannah
And normally you end up doing two quotes almost right. This is what you've told me, that you want. Actually, this is what you need. And it may not be the client is able to engage in that straightaway, but certainly to get there. And those kind of conversation which aligns with the discussion today, multiple touchpoints in the year. You shouldn't be talking to your accountant once a year, ideally not even twice a year.
00:06:38:16 - 00:06:55:08
Hannah
It actually should be multiple smaller meetings. Yeah, they don't need to be a three hour meeting, an hour meeting each time. But just to understand what the business is doing, software allows us to have visibility back of house now, so we can say without coming to see you, etc., but that those insights that you're talking about, that's important.
00:06:55:08 - 00:06:58:11
Hannah
But even if that's a phone call on your way to wherever.
00:06:58:14 - 00:07:15:10
Chris
Yes, that's about to say it's not even meetings all the time, is it? I forget which episode it was, but it was recently that it was talking about. Look, it might just be that we drop an email ago just out of. Look, by the way, you're absolutely on track with what we spoke about crack on, you know, and it's like that didn't need to be a meeting.
00:07:15:10 - 00:07:26:07
Chris
So. But it is those touch points, isn't it? Without question I get that because you're the people that understand what the numbers are telling us at the end of the day, and that's where it's useful. Okay?
00:07:26:08 - 00:07:33:18
Hannah
You're the people that understand your business. We don't get the entirely get that you know, the intricacies of it. It's very important. Two heads are better than one.
00:07:33:18 - 00:07:39:15
Chris
That's a valid point, actually. The other way is that it's not always black and white.
00:07:39:18 - 00:07:39:28
Hannah
Now.
00:07:40:04 - 00:08:03:08
Chris
Which as accountants, you kind of have to live in a degree of that black and white world. I would imagine, because the numbers don't lie. It is what it is. But you need our interpretation of it for you to then interpret what the bigger picture it's. It's a two way relationship, isn't it. Yeah. That's why I whenever I talk about you guys, you're not accountants, you're business advisors as far as I'm concerned.
00:08:03:10 - 00:08:12:08
Hannah
And I think that's the new age of accountants and accountants. Definitely business advisory. And a pragmatic approach is for me is always preferred.
00:08:12:10 - 00:08:17:23
Chris
By that you mean that you don't suddenly dictate to me that I've got to do it that way. Yeah, absolutely. I do appreciate you.
00:08:17:24 - 00:08:38:06
Hannah
But I also, you know, to immerse myself in some more and in what you do, why you do it, how you execute. Because what's the point in me giving you a recommendation for a piece of software or a KPI? You know, a metric to follow if it actually doesn't mean anything to you? And also the language that I talk to you in, why fire?
00:08:38:07 - 00:08:44:01
Hannah
You know, words from the accounting standards or from wherever I went? I mean, that's jargon. Yeah. Yes.
00:08:44:03 - 00:09:02:21
Chris
You know which and I think it was Mike again was making the point saying that's where a meeting does work better because you could be there telling me this stuff. And if you suddenly see this blank look on my face, I haven't expressed it, but you've seen it and you will instantly just reword it in a slightly different way, because you'll have seen that that's just gone straight over my head.
00:09:02:23 - 00:09:25:15
Hannah
I've been with clients before, delivering numbers where we're at, whatever, and realize that of the three people sat there, there was one person who was really not getting it, but was also not vocalizing that. And I'll try it again in a different manner. Still not worked. Look around the room. That was a whiteboard and whiteboard pens. I said, do you mind if I ran drew a picture?
00:09:25:18 - 00:09:38:10
Hannah
Wow. And from there that the trust that came from that client actually, and our relationship really we had a good relationship anyway. But with that individual in particular really flourished. Yeah. And it's yeah, it's just being dynamic.
00:09:38:14 - 00:09:49:06
Chris
Because you can't condescend can you. That's, that's the no, no, no, no, there's a reason why they've stayed quiet. Yeah. They're embarrassed about admitting they don't quite understand that bit. Yeah. Which we never should be.
00:09:49:10 - 00:10:11:28
Hannah
It's complex right. For for a non finance person or you know a non accountant. And it's not your job to know what we do. It's not my job to know how to do what you do. It's about bringing those two skill sets together. So yeah getting up and drawing a picture is actually because someone you notice that someone is much more visual than they are with, you know, lots of words.
00:10:11:28 - 00:10:13:21
Hannah
Yeah. So yeah, you should be able to read that.
00:10:13:26 - 00:10:16:16
Chris
Absolutely. No, it makes sense, right.
00:10:16:18 - 00:10:17:23
Hannah
Writing drawing pictures.
00:10:17:24 - 00:10:24:13
Chris
But got that. Hey, it's not Pictionary so it's fine. Right? Other games are available.
00:10:24:16 - 00:10:28:21
Chris
Right. The full matrix. Yes. Take us through them.
00:10:28:24 - 00:10:41:07
Hannah
So we're here to talk about turnover. Yeah. Gross profit. Net profit. So I'm going to say is profit after tax. Yeah okay. So after you've paid the tax man and cash.
00:10:41:10 - 00:11:00:18
Chris
See this is a key one I, I know when I first set out in business I thought cash was king. And it isn't. That's where we get what Mike calls the naughty boy. Tax the director's loan account because I was naively. God. Oh, no, this is a and I was. No, I've never got I haven't got to the stage of taking, you know, reasonable amounts out.
00:11:00:18 - 00:11:14:05
Chris
But it was, it was like, oh, that's what I was paying. And it was like, no, no, no, no, no, no, it's not cash, it's profit. And that is was my first lesson because the phrase is cash is king. That's what we live our lives by. It is it doesn't work in business.
00:11:14:05 - 00:11:32:25
Hannah
And as we work through these, you'll, you'll we'll start to build a picture and you'll see that actually you might have profit, but then you didn't have the cash in the bank. Why? That is so and that's, that's really important. And that is often where businesses fall down. But I think the first part, the first stage is, is turnover.
00:11:32:25 - 00:11:34:06
Hannah
Yeah. So your sales.
00:11:34:12 - 00:11:42:03
Chris
Can I, can you remind me at this stage, what do you remember the phrase turnovers vanity, profit sanity was like the other way around.
00:11:42:04 - 00:11:45:29
Hannah
I know. That's right. So turnover is vanity and profit is sanity.
00:11:46:01 - 00:11:54:02
Chris
So in other words we can be all chuffed going oh yes, but I turned over this many millions or whatever. But it's all down to.
00:11:54:05 - 00:12:14:11
Hannah
Your bottom line. Yeah, yeah. And as you work through that, I mean, as we work through this conversation, you'll see that actually it's it's not just turnover. It's not just, you know, my cost of sales, which are, sales that would not ordinarily go up and down with your sales. So if you increase volume, then your cost base goes up, for example.
00:12:14:11 - 00:12:15:14
Chris
Yeah.
00:12:15:17 - 00:12:25:00
Hannah
It's not just that. Then you get down to interest. So how much debt do you have? And then you get down to your bottom line and you go, oh, sugar.
00:12:25:03 - 00:12:29:22
Chris
That's good control there. By the way, with the wording of that. Thank you.
00:12:29:24 - 00:12:31:02
Hannah
It's because we're at the beginning of the week.
00:12:31:05 - 00:12:31:22
Chris
Oh that's right.
00:12:31:22 - 00:12:33:12
Hannah
Yeah yeah.
00:12:33:15 - 00:12:34:07
Chris
Yeah that's.
00:12:34:07 - 00:12:34:12
Hannah
Been a.
00:12:34:19 - 00:12:37:05
Chris
Big yeah.
00:12:37:07 - 00:13:00:29
Chris
Especially when you of I was like oh go where we go. It might work very well controlled it okay. So we kind of start from a sales perspective. More often than not we focus a lot on the turnover for that only. Yeah that's what we're driving. And the the profit almost becomes an afterthought because you're like yes. But what does that cost me to get that.
00:13:00:29 - 00:13:03:00
Chris
So that would be the wrong way to go.
00:13:03:00 - 00:13:22:00
Hannah
It basically most people jump straight into right, okay, I want to, for example, these nice big round numbers and they go, right, I'll do 100 grand this year, 200 grand next year, etc., etc., etc., etc. now I'm not going to pick on there. How do you get from there to there? Because you're not even at that stage yet.
00:13:22:03 - 00:13:48:01
Hannah
You need to go back and say, what do I need? And how you do that is I think Michael has done a video possibly before, but we reverse engineer. Okay. So I would be start with, what's one that I've done recently? I've been sat with a client recently, relatively young and, you know, has plans for a family but has a really, you know, prospering business, etc..
00:13:48:03 - 00:14:06:29
Hannah
What do you want in your life? First question. Right. Okay. Well, I want to purchase a property. I would like to do this x y z. So then you go okay well this is the amount of money you need. This is what you need to have your household function. This is what you need for your savings and investments.
00:14:06:29 - 00:14:19:29
Hannah
And then this is what you need for other just life stuff. Yeah. Water slush fund, whatever you want to call it. Right. That number you then take that number, say more than likely that would be a per month or whatever it is annualize it.
00:14:20:02 - 00:14:20:24
Chris
Yeah.
00:14:20:27 - 00:14:42:29
Hannah
And then you work backwards so you add b gross back up the tax, you add all of that back and then you get to your profit after tax figure. Right. So you I've gross back up for personal tax okay. And then we gross back up again and we work all the way back up to turnover. Now that is really daunting to do for a lots of individuals without finance.
00:14:43:01 - 00:14:46:28
Chris
Invariably higher than we were expecting. Isn't it. That turnover target.
00:14:47:01 - 00:15:06:10
Hannah
Yes. But also the mathematics involved. Yes. Because of grossing back up for tax. You know that that can be a little bit daunting for people. Super easy for your accountant to do. But yeah, work backwards and then you get to that figure and yeah, you're right. Sometimes people are surprised and go, gosh, that's daunting. But then you can break it down further.
00:15:06:10 - 00:15:33:13
Hannah
Maybe we could do a different video about that. And in terms of strategizing, because that is a good bit of business advisory that we do. Yeah. But to set that turnover, you need to reverse engineer now in a larger entity that may look slightly different. It might not be your business, might be comfortable, and it's giving you what you need to live the type of lifestyle that you've become accustomed to, or you know, that you were striving for tech.
00:15:33:16 - 00:15:55:00
Hannah
What was the next stage? Well, it might be that your business is renting a premise at the moment and but it wishes to purchase. Yeah. It might be that, I don't know. You want to, invest in a new revenue stream, whatever that is. You then getting into Warm Waters territory, right? But either way, it's another goal.
00:15:55:02 - 00:16:13:13
Hannah
So then you're effectively doing the same exercise. Well, how much do we need to increase by. So with turnover first place first thing you need is something to work towards. Yeah. Otherwise what are you comparing it to all of these metrics. Yes. You will be looking at them holistically but they all help you deliver on the strategy.
00:16:13:15 - 00:16:16:05
Hannah
So set a strategy first.
00:16:16:07 - 00:16:40:01
Chris
Right. And as you've explained there, there's a lot more to it than the US as the business owners. We just think in business and brass tacks that that we may or may potentially be aware of. You've got to try and explain that to people like us as well. Once you're then paint in that picture and not just make us scared the living daylights out of us.
00:16:40:04 - 00:16:44:24
Chris
And to make it make sense, because we're not just going to go, oh, well, I'll do that because you said I need to.
00:16:44:27 - 00:17:10:28
Hannah
That's where the language piece comes in. So number one, you made a point earlier about does that figure that comes out then scare people sometimes it it might. And therefore do we then need to be a little bit more realistic. So do we need to adjust that figure or whatever it is. But if I just said to you right, you need to do, you know, 500g worth of sales?
00:17:11:01 - 00:17:52:15
Hannah
Some individuals it would just be a number. But what you need to do is live and breathe that in order to achieve. Think of any, you know, goal that you've had in your life doesn't just come easy. Yes, you have to work to it. And to motivate that, we need to talk in meaningful terms. So for, a pub owner, that might be you know, X amount of pints or something like that, someone who's selling widgets, X amount of widget X amount of clients that are on a monthly retainer, you know, in a, in a service business, translate that into something meaningful for you and it becomes possibly less daunting.
00:17:52:15 - 00:17:56:23
Hannah
But it's much easier to try and achieve will.
00:17:56:28 - 00:18:19:28
Chris
And I apologize because in my layman terms, I'm going to start inadvertently between turnover, gross profit, net profit. And I'm sure I'm not the only one that does that with you. But there's this. I mean, you mentioned cost of sale, and I don't know whether this apologies if this is stupid now, but I don't know where this comes on the cost of sale.
00:18:19:28 - 00:18:38:21
Chris
But for example, they could be, a ceiling of amount of work that the business can do with the number of people on board right now that suddenly says, cool. But once we get to that point, I'm going to need another person that's now an additional cost. So actually, that's got to be taken into account before we can get to here, to get to here.
00:18:38:27 - 00:18:45:20
Chris
Do you start looking at that at that stage or is that a pivot or moving point instead?
00:18:45:22 - 00:18:54:16
Hannah
So I think that is part of when you've got a turnover figure that you need. That's when you look underneath you and you go, okay, well what resource do I have available?
00:18:54:16 - 00:18:55:03
Chris
Yes.
00:18:55:06 - 00:19:19:22
Hannah
Now what's difficult with that is let's talk about the simple situation. The simple situation would be that, you know, the turnover figure and you have the resources to be able to to get it easy. You just work towards that in the scenario that you're giving now. Or maybe it could be a hybrid where you're okay right now. But as you're gearing up to the turnover goal for year to year three, then we're going to have a problem.
00:19:19:22 - 00:19:45:13
Hannah
Then we get into the chicken or the egg, right? And I was always taught, this is my first boss in in a firm. He I remember him saying that you start first and then you drop the work on top. We're now living in a world that is our costs. Exponential. Right. If we just think back even to the before Covid, you know, wages cost it to significant.
00:19:45:16 - 00:19:55:19
Hannah
And it seems everything else is just significant. I ordered a McDonald's breakfast the other morning. Such a yeah.
00:19:55:24 - 00:19:56:22
Chris
Yeah. So no.
00:19:56:22 - 00:20:14:24
Hannah
Judgment. Anyways, I had to, you know, it is a normal meal. Extra hashbrown. I got a little something for the dog. My husband, it was like 30 pounds. It was like 30 pounds. 32. I nearly a nearly didn't press it up. I was already salivating by this point, so I had to pass. Yes, but, you know, costs are crazy.
00:20:14:27 - 00:20:43:16
Hannah
So, it's a really difficult one. Chicken or the egg, but I guess that's why you're all entrepreneurs. Because there is an element to you that is actually very creative, and you have a stomach for risk. It's just about making sure that it's calculated risk. That's why you talk to us, talk to your accountant before you invest, before you finance a big piece of machinery, do it before.
00:20:43:17 - 00:21:05:20
Hannah
Because what we need to work out is the cash flow situation, which is, I guess, underpins all of this conversation with how these metrics work with one another. So to get the turnover, you're going to need more staff. Okay. But then do you have the cash? You might be okay now, but you might actually show that in month nine of this year you have a whole how long the whole going to last.
00:21:05:20 - 00:21:09:10
Hannah
Do you have an overdraft to cover it? Is that actually very expensive.
00:21:09:12 - 00:21:29:13
Chris
Yada yada yada. Yeah. Which again, I can very much relate to is that I know to kick on to my next level, I need another person, but I categorically just cannot afford that other person. So that staff first drop is like, I would love to be able to, but it's the whole blood from a stone situation. So we're kind of building up.
00:21:29:13 - 00:21:49:00
Chris
And then as the business owner, I'm doing that as much as I possibly can. At the same time, I then know that once we then increase that business, well, it's going to be too much for my, editing and production team. So suddenly there has to be an addition to that team as well. And that's that constant moving target.
00:21:49:03 - 00:22:11:27
Chris
Is it true? I'm going off on a tangent now because and I believe this, but I might be comforting myself with this. There's almost like an invisible line that that initial scale up stage is very, very hard. But it then sort of can become a little bit more self-funding, I guess, is the phrase I'm thinking, yeah, but it is invisible.
00:22:11:27 - 00:22:20:12
Chris
We have no idea what point we have to cross over before it becomes off we go. And yes, I'm adding people, but everything's paying for itself as I go now.
00:22:20:12 - 00:22:46:17
Hannah
Yeah. And I think the good news there is that, yes, that does exist. Right. See it a lot within our firm as well. Yes. That invisible line is there. And I think that once you pass it, you might go, oh, I'm, I actually passed it because you, you almost like, you don't want to leave it, you know, is there going to be something else around the corner, especially how business has been over the last few years with Covid and everything else and wars and everything else?
00:22:46:19 - 00:23:04:24
Hannah
The bad news is there's and there's another one, is there? So you'll go through that and then you'll get to a point where, okay, you almost like, you've come over a hurdle. Yeah. Yes. Come over. I don't know the saying that I'm referring to, but you know what I mean. Yeah. And then you're okay. Growth. Great great, great.
00:23:04:26 - 00:23:26:06
Hannah
But then you'll get to like the next. So for example, million pounds worth of sales. Really difficult to get through really tough to push through the first million. When you push through the first million. Brilliant. The next hurdle is trying to push through the HTML, which is it can be very difficult. It depends what industry you're in. You know, what you're selling, who you're selling to.
00:23:26:08 - 00:23:31:18
Hannah
So it's almost unique, to many of us. But yeah, it definitely exists.
00:23:31:24 - 00:23:48:08
Chris
It's that way again, just taken on board what you were saying there that some people then make a decision that goes, that's it. I'm not growing anymore. I'm happy where we're at. Can you maintain a status quo? Other bands are available.
00:23:48:10 - 00:24:03:13
Hannah
So, yeah, that's a really loaded question, actually. Yeah, I think a lot of that is down to personality number one. Yeah. If you are somebody I don't mean this with a negative connotation, but I'm going to use the word in any case, greedy for more than you know, you'll go out and you'll grab more.
00:24:03:16 - 00:24:04:16
Chris
Let's say hungry.
00:24:04:18 - 00:24:05:04
Hannah
Yes.
00:24:05:06 - 00:24:07:08
Chris
So hungry.
00:24:07:10 - 00:24:09:12
Hannah
So. And now I'm hungry. You said the word hungry?
00:24:09:17 - 00:24:12:09
Chris
No.
00:24:12:11 - 00:24:38:07
Hannah
If you are the kind of person. Yeah, that is hungry and wants to drive forward, then you know you'll keep wanting to grow. But actually, if you sat down and thought. But it depends where you are in your life as well. I suppose if you sat down and got my I needed to get to this because that lifestyle, my kids and my wife, etcetera, we can all go on holiday two times a year in a in a fabulous destination and resort to children can do any activity they wish.
00:24:38:10 - 00:24:57:00
Hannah
You know, Christmas is okay. You can have 14 people over for Christmas dinner and fit the bill. That's all right if you can get to that stage and that is comfort comfortable to you then. And I call that financial freedom. Yes. Yeah. So that's my definition of financial freedom. And then somebody else may have a different one.
00:24:57:00 - 00:25:16:06
Hannah
They might want to you know no pressure. Oh yeah. Lovely. But they might want to walk into Harrods and never have to worry about the bill. You know, that's not my idea of to be nice, but it's not my idea of financial freedom. Yes. It's a get. When in your going back to your, your statement about is it possible to, to stay there?
00:25:16:08 - 00:25:46:11
Hannah
Yes, but not without taking your eye off this stuff. Because even if you keep your turnover level delivering, if you didn't have your eye on that margin and you don't have your eye on the cash, then it will erode and it will very quietly. Right. And then all of a sudden it's like your windows in your house. So, I don't know, maybe I'm the only person that thinks this, but when it's lovely and came off brilliant and the garden looks lovely, the tree company, the windows was so messy for so long, and then all of a sudden everything's fine.
00:25:46:11 - 00:25:55:13
Hannah
And then weeks and weeks later, my mother's coming round on the Saturday. You have a quick oh my goodness, look at the windows. You know, it's eroded before your eyes.
00:25:55:15 - 00:26:09:25
Chris
And you know, things happen like costs go up so it changes what it is. I mean, I guess that there is a whole, excuse me, the evolving conversation between us and say, you guys, for example.
00:26:09:27 - 00:26:38:24
Chris
Is when when we've broken through those different lines or whatever we want to call it. Our desire, as you mentioned about, is what we want. And we go, no, no, no, no, I'm trying to get to that. I'm trying to get it to sell it. I'm trying to get to this point. Whatever it might be could change. I give one example that I hear quite a lot punch drunk is that we've had to work so hard to get it through that point, and so many challenges that suddenly came up.
00:26:38:24 - 00:27:01:04
Chris
You know, the government suddenly decide things with National Insurance and minimum wage or whatever else to make it hard for SMEs. And we then go, do you know what? I'm not bothered about that, that anymore. I want this financial freedom I think is a I think that's become much more popular now, in my opinion, because of how hard it's got.
00:27:01:06 - 00:27:19:06
Chris
You have to be prepared to change your interpretation of what we're looking at as well, haven't you? Yeah. So you've got to be constantly listening and looking at the business owner to go, right where, where are they? What's that? What's their emotional state now. Yeah. What's their preference?
00:27:19:09 - 00:27:44:03
Hannah
I think that that every time I meet with a client or have a chat with a client on the phone, maybe I haven't spoken to for a couple of months. That's always in the conversation. So a Friday afternoon I did a, like a tax planning meeting with, with a client and his wife and a very, very small amount on where they where the business is being right.
00:27:44:08 - 00:27:51:03
Hannah
Because we're not really interested in the past, like the numbers are the numbers. Lots and lots of conversation about future.
00:27:51:05 - 00:27:53:08
Chris
And not just business, but personal as well.
00:27:53:09 - 00:28:14:10
Hannah
Yeah. And most of that actually. Yeah, most of that was loaded into personal because for the side of business they have that that then has a knock on effect to the business that they own. And yes, answer to answer your question, but it is always a question accountants should be asking. And if we're not that's, that's a that's somewhat of a problem.
00:28:14:13 - 00:28:34:06
Chris
Yeah I know and and again I think it was Mike was making that comment is that it may seem that that you're being nosy about our personal lives or over friendly. Not that I've ever thought that over for me. It's just that. Yeah. Oh, let's get on with the business. It's like, no, no. Little did we know you were already collating information just in those conversations.
00:28:34:06 - 00:28:49:29
Chris
And it's like, have that he used an example that someone just suddenly I forget exactly what it was. I think it was about building the extension. And he's like, hang on, go back to that minute. So you want to do that. And he's like, yeah, yeah. Thinking it's just a personal thing. Nothing to do with this. Yeah, well there's something we can do here.
00:28:50:02 - 00:29:10:01
Chris
Oh, you know, I want my daughter to be able to go to university in four years time or whatever it is. Hang on. What we need. If we can start thinking about that now. And these are all important things that even when we you've put for matrix turnover, gross profit, net profit, cash, they're all influenced by a whole load of different things.
00:29:10:01 - 00:29:10:19
Chris
Yeah.
00:29:10:22 - 00:29:26:21
Hannah
And Mike's right. Like sometimes I catch myself on the phone so I'll be a prospect, you know, telephone down or whatever it is. And, the goal is always to go out and see them face to face. But first you gather some information and I'll be on the phone. Okay. And, Okay. How's your wife? Yeah. And what does she on?
00:29:26:21 - 00:29:39:11
Hannah
And you kind of catch yourself and go. I'm asking these questions for a purpose, I assure you. And, yeah, often I straight up say I am being nosy. But I need to have the full picture. Yeah.
00:29:39:13 - 00:29:49:05
Chris
Which is nice. It's like a it's like a financial cuddle. Yeah. You can have that one.
00:29:49:07 - 00:29:52:27
Chris
I can tell from the reaction that's one you've never, ever had.
00:29:53:00 - 00:29:53:25
Hannah
I'm not really a hugger.
00:29:54:00 - 00:30:04:10
Chris
Yeah. No. Exactly. One of the comments that you put in this thing, though, is that there's always a risk on focusing on only one of the metrics or 1 or 2 of the metrics.
00:30:04:10 - 00:30:32:14
Hannah
Yeah. So I think that leads us into nicely into gross profit. So, barring that turnover, obviously your sales gross profit, profit is your cost of sales. Okay. And often these sales vary with output, as I said earlier. And in simple, simple form, say you sell, this lovely, false succulent. So you sell those. The more of those that you sell, the higher your cost of producing.
00:30:32:20 - 00:30:58:16
Hannah
Said succulent will be because you're increasing the volume. Yeah, yeah. Even if you buy in from China or whatever, you got freight, cross duty, you know, etc., etc.. So that is gross profit. After that you have overheads. Yeah, you'll rent your heat and light etc.. Wages sometimes that increase in cost of sales too. Sometimes you have a mixture in cost of sales or in overheads.
00:30:58:16 - 00:31:17:09
Hannah
Depends on the business. So when I'm talking about gross profit, what I mean is that for every pound of turnover you make, say your gross profit was 30%, for every pound of turnover you have, £0.30 is the gross margin. The profit.
00:31:17:12 - 00:31:18:17
Chris
Gross profit okay.
00:31:18:19 - 00:31:57:07
Hannah
Yeah. So the reason that this is an important metric is that often cost of sales is isn't always the case, especially in a, in a manufacturing business. Yes, this is definitely the case. But when you start to get into something like your business, for example, it gets a little bit more tricky. But essentially, gross profit is you should always, always in a percentage normally, or you can think of it in, in pence, but never I would, I would stay away from the monetary side as much as you can.
00:31:57:07 - 00:32:19:20
Hannah
So say your turnover was, 100,000 and you were aiming for a 30,000 pound margin. Right? So 30%. I wouldn't ever suggest relying on that. 30,000. 30% is what you need to be relying on. And the reason for that is that the percentage makes it relative, right?
00:32:19:22 - 00:32:20:06
Chris
Of course.
00:32:20:11 - 00:32:44:27
Hannah
So gross profit margin is calculated by turnover minus cost of sales. And that gives you the margin. Yeah. And you can convert that into percentages a percentage by taking that margin and dividing it by your turnover. That's how we get the percentage. I would always focus on that percentage. I also would completely ignore the calculation I just talked about.
00:32:44:27 - 00:33:07:10
Hannah
You set it up on a sheet once and that's it. Or most software will spit it out for you and calculate it for you. Okay. Yeah, but it's a percentage that's important. And the reason for that is because your turnover could be going up and up and up and up and up, but actually your costs have also been going up and up and up and up or your turnover.
00:33:07:10 - 00:33:14:13
Hannah
And this is what's happening a lot, right? Your turnover stays the same. And you think I'm safe.
00:33:14:15 - 00:33:15:00
Chris
Yeah.
00:33:15:07 - 00:33:36:12
Hannah
But actually what's happened is your cost base is increased and you have an increase to prices we've all got in our emails right now, no doubt. AA Ian, you know, all of these suppliers saying, oh, inflation. Well, maybe not the other day. Inflation is currently at 3% in something, which means you're having a 7% rise in your, you know, in your costs.
00:33:36:12 - 00:33:37:23
Hannah
And I thought this.
00:33:37:26 - 00:33:38:12
Chris
A bit of.
00:33:38:12 - 00:33:39:00
Hannah
A disparity.
00:33:39:00 - 00:33:41:07
Chris
Yeah. Okay.
00:33:41:10 - 00:33:51:25
Hannah
And I think that's the, the biggest issue that people that businesses are finding at the moment. And it's because they don't have this visibility. So this percentage always, always percentage.
00:33:51:25 - 00:34:20:20
Chris
And it is very important because of course. Yeah. Where all of our costs going up because their costs are going up. So not even just, you know, by any kind of national figure, but by their cost of increased, we have to therefore increase. But no one likes to do that and we're scared to actually put that. But it's like you don't have a choice, but if you're not looking at it, you can be the nice person and try to keep your cost the same, and suddenly you're eroding into that money.
00:34:20:22 - 00:34:21:22
Chris
00:34:21:25 - 00:34:50:17
Hannah
And sadly, when that happens, it often the realization comes far too late. And I don't mean far too late, as in, okay, the business is now insolvent. I mean that I think emotionally when a business owner sits there and they're in a position then where their margin is basically gone, it's not a case of, it's not as dramatic, hopefully, as having to pack up shop and, you know, you're done.
00:34:50:20 - 00:35:08:06
Hannah
But it's the feeling of going, I've just worked my ass off for the last year, and you're telling me that it meant nothing? Yeah, it's that and that I think can be soul destroying for individuals as well. That's really tough.
00:35:08:09 - 00:35:25:12
Chris
It can. And then I guess once that's settled, then you've got to look at it, which is what we're touching on today is is okay. How can I change that? It means yes, my prices do have to go up or it means I've got to cut costs somewhere. But in essence, it needs to be looked at again.
00:35:25:15 - 00:35:27:07
Chris
Yeah. And reanalyzed.
00:35:27:09 - 00:35:46:09
Hannah
I think people worry about putting, costs up because you've gained a part of your market share, right? Especially if you're a smaller business. But there are other businesses kicking around that do similar things within the locality or whatever it is. But often I think that you'll know your customers, your clients that may have a problem with that.
00:35:46:11 - 00:36:07:23
Hannah
However conversations. This is like our best tool just to kind of pick up the phone. Or, you know, if that's not possible to actually have it. Can a lot of David love it, love it, love it over social media and within your, you know, email matches that are going out, etc. and just being honest.
00:36:07:24 - 00:36:08:09
Chris
Yeah.
00:36:08:12 - 00:36:09:18
Hannah
Because we're all human.
00:36:09:26 - 00:36:30:21
Chris
And it could include in some cases that you have to let a customer go. Yes. And and that's a realization that, hey, we don't want to think about that. And, and B, we might not understand that it has to be until we look at this holistic, not just one metric, look at the whole lot together and goes, you know what?
00:36:30:24 - 00:36:35:27
Chris
They're not going to accept a price increase. I can't have them as a client at that figure.
00:36:36:00 - 00:36:36:17
Hannah
Yeah.
00:36:36:19 - 00:36:54:22
Chris
I'm you know, we're not here for that. We are a business. Yeah. And so it's about seeing the bigger picture to know if that ever became the case. And we would need to know for definite, wouldn't we, as business owners. Right. Am I really going to consider this? I need to know that without question, this has to be the.
00:36:54:25 - 00:37:15:27
Hannah
Yeah. And often I think you can you have that data and then you go for that conversation. And if you aren't able to meet in the middle to increase, it might be that you agree to increase the price over two years. For example, you know that there are ways of being somewhat flexible without it costing you too, costing you too much.
00:37:15:27 - 00:37:30:08
Hannah
But you've actually done I think you've personally, for me, you've shown integrity because you, you know, you've put yourself in front of the client, you've had that conversation. We're all running businesses at the end of the day. So we should totally understand where one another's coming from.
00:37:30:10 - 00:37:54:17
Chris
Yeah, we're not being greedy, but we aren't being a charity either. It's that balancing act about understanding that something needs to needs to give here. I mean, I had one recently, one of my subscriptions that we have to have as part of what we do for, for our clients suddenly was about to double monthly. Like next month, the figure will be this.
00:37:54:19 - 00:38:12:11
Chris
I was like, what? Where does this come from? And I dropped them a line and said, look, I would love to stay with you, but you've just out of the blue, it's going to suddenly cost, you know, 100 pounds more a month. No chance. I cannot do this. But I've enjoyed working with you, so I'm giving you a chance.
00:38:12:12 - 00:38:37:10
Chris
Look at it. They went. Look, we understand we have to put our costs up, but we understand that this has come from nowhere. We will keep it this price for the next 12 months. But you need to then budget for the fact that the end of that 12 month period, it will be going up to this or whatever it's equivalent at that time is and so you can either choose to sadly take that, go somewhere else or have budget budgeted for it.
00:38:37:10 - 00:38:55:27
Chris
And I went, I can live with that. I don't like that it's going up. But they've been honest with me. I presume, they said that they've had to face it, and they've clearly gone and looked at the bigger picture of what they need to do, because that was no small increase. And it will be things like they've added functionality that actually probably doesn't make a difference to me.
00:38:56:04 - 00:39:03:01
Chris
Yeah, but they've increased the value and the cost etc. of of their service, their products.
00:39:03:01 - 00:39:22:01
Hannah
I yeah. And I think this is where so if you know, if you're, if you're monitoring your margin and then you're noticing dips, then you're then you need to investigate and understand why that is. Okay. So, you know, maybe it is that you have to transport goods. And all of a sudden the freight carrier is becoming exponentially more expensive.
00:39:22:04 - 00:39:43:03
Hannah
Do you need to renegotiate and have it? It just helps you have your finger on the pulse or on the button. Yeah. It just helps you have the current knowledge. Yeah. Current data in order to make informed decisions. But most importantly, I think to make those decisions within an appropriate time frame before we get to that erosion.
00:39:43:09 - 00:39:50:05
Chris
Yes. Can we can we stomach for another 12 months, for example? But that has to be the bandaid ripped off at that point.
00:39:50:05 - 00:40:19:08
Hannah
Yeah. And to pull these two metrics together that we talked about so far, you could have a turnover of say, you know, 200,000 and you have a client that you can now win for 10,000. It's going to put 10,000 revenue on that per annum. Okay. Brilliant. But if it's at a margin of 70% when actually your margin is is 30, you either then decide no or you think you might think this client and I can see that growing.
00:40:19:10 - 00:40:43:00
Hannah
And I know that this client in three years time will actually become a 35 grand client, at which point my from a margin perspective, I will be able to, develop efficiencies and operate at a lower margin. So what what's important here? When you look you're looking at these metrics. They actually that they're focused in the here and now.
00:40:43:02 - 00:41:05:25
Hannah
But because you're a business owner you're also a strategize. And sometimes with a client, it's worth looking at the short term medium term and the long term. And that long term piece is really important. I remember going into NatWest, when I went to university, I went into NatWest and I said, can I please open a student bank account?
00:41:05:28 - 00:41:23:25
Hannah
And, at the time I lived overseas, so I didn't have an address in this country very long. And they they were actually quite rude. And they said no. And I thought, oh, right. Okay. And I walked out of that extremely embarrassed. But it is what it is. I won't need them now, you know.
00:41:23:28 - 00:41:24:21
Chris
Yeah.
00:41:24:23 - 00:41:33:13
Hannah
But maybe I'm not the kind of client that they've go, the kind of customer that they want. I don't know. But I think that speaks for itself.
00:41:33:16 - 00:41:50:06
Chris
Yeah, yeah, I know you do. You have to think of that effect on people, don't you? Without question, you made another comment here. What good looks like and the crossover between visibility and decisions. What does that mean.
00:41:50:08 - 00:42:15:13
Hannah
So in terms of these, I meant that very I meant not in a holistic sense. So the metrics we have, our turnover, gross profit, we've talked about in detail. We there are two others, which is profit after tax and cash. Now what good looks like is the number one you're achieving your strategy. Yeah. So with the turnover that you wanted or whatever.
00:42:15:16 - 00:42:42:00
Hannah
But also within that strategy you'll have a margin that you're working towards. And then also you'll have things like in terms of cash, you might have something like that a days, how quickly your customers are paying you. Right. Or if you kept stock, you might have a certain level of stock or a, a stock system, you know, do you get it in just in time, you know?
00:42:42:00 - 00:43:10:12
Hannah
What are you doing? What good looks like is whatever metrics there are for you, are they actually serving a purpose? There's no point in measuring things if it's just going to end up being a number on a piece of paper that you never do anything with. They need to be metrics that help you make decisions. They should not take an excessive amount of time to pull together because you look at your life right?
00:43:10:12 - 00:43:27:09
Hannah
And you go, okay, how much have I got time? I got this amount of time to go to work and to progress, the business. But then I've also got a family or, you know, or whatever that is. Yeah. So you need to you need to manage that. And it needs to be something that's, that's really, really fluid, quick and fiery.
00:43:27:10 - 00:43:42:15
Hannah
And you should know that if these four metrics are performing, then the business is performing. You should know that straightaway for numbers. Look at them. Are we doing okay for numbers? Yes. Move on. Do I spend any more time on it?
00:43:42:18 - 00:44:04:29
Chris
Which just makes me feel that I probably couldn't go and just lay my hands on those right now, if I'm honest. But you talk about tools I do through you. I guess I probably shouldn't name the platform that I happen to use, but that does give me and you as my accountants the ability to to to see that information straight away.
00:44:05:02 - 00:44:07:14
Chris
As long as I'm up to date on my reconciliation.
00:44:07:16 - 00:44:35:21
Hannah
Yes, it does. And that that is a very important point, actually. Chris. Yes. That's right. There's software. So there's the that's finance software's, Xero, QuickBooks, sage Freeagent, to name a few. And the crux of it is that they all do very similar things. I think the key difference would be accessibility or, you know, how intuitive they are.
00:44:35:23 - 00:45:08:24
Hannah
I can't stand QuickBooks. Michael loves QuickBooks. I love Xero because I wasn't here like zero. See what two accountants that yeah that are really, really different. The bit way you can go a little bit extra with it, right, is that your system won't necessarily, you know, pop this stuff out. No, just a click of a button. You either set up bespoke reports within the system, which will give you most of what you need, most of what you need here without too much intervention.
00:45:08:27 - 00:45:29:04
Hannah
Or you can do it. You can easily add on. Okay. So especially when you're going into a bigger size business, you use an add on. So a couple that I use I really like spotlight for them. Very simple. One would be fluidly. And what these do is that these systems pull your numbers together. So you get a profit and loss and you get a balance sheet.
00:45:29:06 - 00:45:52:09
Hannah
But what you can also do is a cash flow. You can put the budget in that you have for the year. So what is my turnover, what's my cost of sales, etc., etc. but what it'll also do is forecast and it's that really clever, right? Because they forecast over time through an API connection, and whatever cleverness they have in the background.
00:45:52:09 - 00:46:17:00
Hannah
And now the use of AI to they analyze the data in real time and the type of data they're analyzing is right. You pay Joe Bloggs every month on the 28th or the nearest working day. Your customer, ABC limited your payment times at 30 days. Actually, they lag on. On the average of the last six months, they've paid at 45 days.
00:46:17:03 - 00:46:39:11
Hannah
So it'll cashflow forecast that and it will build those metrics into it. So you can have a really accurate depiction of where where you where your business may be. And then another really powerful thing that you can do very easily within these tools is you asked me a question earlier about whether or not I should take this client home, but I'm going to need to buy another.
00:46:39:12 - 00:46:42:06
Hannah
I'm going to need to buy in more, resource.
00:46:42:08 - 00:46:43:06
Chris
Yeah.
00:46:43:08 - 00:47:06:22
Hannah
You can set up a scenario. You can very, very quickly go in there. You can put in the person that that salary, it'll add on on costs and AI etc. pension. Or you might say, oh, is it better for me to subcontract? We can build another scenario and work that in that way, and then we can very, very quickly see the impact on cash over an extended period of time.
00:47:06:25 - 00:47:29:12
Hannah
It's and to me that that's so powerful to be able to make a decision like that, because let's continue with a staff example. It's a, an employee's world right now. Okay. So we're faced with massive recruitment fees. And there there are certainly in my world it feels like there's a lot more jobs and there are people available.
00:47:29:14 - 00:47:46:27
Hannah
I was speaking to a recruiter recently actually, and legal side, it seems to be flipped the other way. There's a lot of newly qualified and not not jobs. So that's just to highlight the, the, the differences that we can face over the industries. But you might need to react really quickly and get an offer out to a person.
00:47:47:00 - 00:48:05:24
Hannah
But you need to also see very quickly if you can afford that. And it's not just about the profit at all. So if I could just touch on the other two metrics, the the profit after tax is important because after you've, after we've got to gross profit, then you're adding on all of your overheads and you think, oh, they're just overheads.
00:48:05:25 - 00:48:27:11
Hannah
Actually, rent can be very expensive. The subscription, what we call it snowball. I've just told you about an add on. Right. You got your normal subscription for your finance. Next thing you know, you've gone for an add on something that was only 50 pound a month. So that seems okay as now just become a hundred double the gentleman.
00:48:27:11 - 00:48:50:10
Hannah
All the people in the company. Yeah. The company that's just, you know, attempting to, double your fees. Those can get out of hand. So it's really important to have visibility of those. And then there are other many other energy. That's been a huge issue for us. So after that you get to a profit after tax figure. And the reason I say to focus on profit after tax is because you have net profit, profit before tax.
00:48:50:10 - 00:49:15:02
Hannah
And you go, I've made a good bit of money actually. The tax rate has just gone up for corporation taxes last year, up to 25% for profits over 50,000. All right. So what you are used to paying 19% me so that means that you've now got 25. Yeah. For anything over that 50. And between 50 and 250 you run a marginal rate of 26.5.
00:49:15:04 - 00:49:38:14
Hannah
That feels very, very different. Yeah. Especially when it comes out your bank for the first time. Yeah. So very, very important metric because you can't take dividends unless you have realizable profit. Right. On those profits. We had a conversation about that before this, before we started this. So that's important. And the last one is cash. Cash is king is what you said.
00:49:38:20 - 00:50:02:11
Hannah
It is king because it's literally the driver of how the business functions. So if I said to you, your turnover is smashing it, right. You wanted half a million, you're on half a million. Five. Fantastic. Your margin is 30%. It's stable. You're achieving 30% every time you have profit after tax. But you don't have any cash in the bank.
00:50:02:13 - 00:50:04:00
Hannah
Why could that be?
00:50:04:02 - 00:50:06:05
Chris
I don't know.
00:50:06:08 - 00:50:16:11
Hannah
So could be a couple of things. One of those things could be that you hold stock. Of course you have bought too much stock.
00:50:16:17 - 00:50:21:00
Chris
That's why I struggle with it, because it goes I'm not a stock based business. So. Okay, that is very if.
00:50:21:04 - 00:50:49:03
Hannah
There is an important one really relevant to you, which I'll give off a bit stock. Many businesses, some panic. Right? Yeah. Because they've got market share. They've got their market share. They people are so price conscious and information is so, it's available at the tip of our fingers now. Okay. They can just go online. They can go on to big Large Companies website and check the stock availability at their warehouse there and then on a wholesale basis.
00:50:49:03 - 00:51:10:06
Hannah
And when it's going to be delivered, that means you are really at risk for the customers being really dynamic and making very fast choices. So often we say that they hold lots and lots of stock. So all your cash is tied up in that stock. Yeah. If you hold on for the stock too long, it can go obsolete and you're going to have to it's going to be worth nothing and you certainly won't be able to sell it.
00:51:10:08 - 00:51:28:23
Hannah
Or if you're in a business whereby the product moves on quite quickly or maybe the appetite of the customer moves on quite quickly, then all of a sudden you're in a position where you've also got stock that you can't sell, so your cash is being tied up. You created a loss when actually you did it because you were trying to make a profit.
00:51:28:25 - 00:51:29:17
Chris
Yeah.
00:51:29:20 - 00:51:55:28
Hannah
The other common example is, debt is having your customers not pay you on time or within the time frame that, that you need. You really have to have a close handle on that is you need to be constantly watching it. You need to be as an SMB, you need to be willing to pick up the phone to those ones that aren't paying, put procedures in place and consider getting legal if you have to, you know, and very easy to do.
00:51:55:28 - 00:52:21:18
Hannah
If under 10,000 going on is not going to, escalate into small claims, they've got to include interest. And, yeah. So when we look at these four metrics together, I think that example shows you that you can be absolutely smashing it over here, that that one metric has fallen cash. And then all of a sudden you are struggling to pay wages potentially, you know, or yeah, whatever.
00:52:21:19 - 00:52:37:21
Chris
And there's been the occasional time when you talk about cash is that you kind of sit there and you can't even just take you definitely can't take it on just an annual basis, not necessarily quarterly, sometimes not even monthly. So you kind of go, well, that's cool, but I know I've got to pay all of that by then.
00:52:37:24 - 00:52:58:21
Chris
But actually these invoices aren't being settled until then. Yeah, at best. Okay. I've got because I've gone and bought something that I need it here, for example, that now means I've not got the cash to pay that. And so you have to be aware of that because these things go in peaks and troughs of what you choose to invest in and what comes in.
00:52:58:24 - 00:53:09:15
Chris
And, and I've, I had once or twice the situation has gone whoops, I need to get this sorted out. So you sometimes have to take it on a like a daily or weekly basis.
00:53:09:17 - 00:53:10:05
Hannah
Perhaps in some.
00:53:10:06 - 00:53:10:27
Chris
Extent.
00:53:11:00 - 00:53:37:09
Hannah
And I think the, the tools that we've talked about help you do that. We've got bank feeds now so you can virtually within 24 hours suddenly see, the life that and there's only some banks that are that late. Most of them are within 5 minutes to 2 hours. That bank balance in that is real, you know, and the transactions in that are real, providing the reconciliations, have been done correctly historically, you know, that that they are real.
00:53:37:12 - 00:53:54:29
Hannah
So what you have is these four metrics and, you know, just the example we just gave is that turnover, net profit, profit after all of that was working but cash was in. But then we could also be going a slightly different way. You could have your turn. So if you had turnover down, a margin down everything else would be lower.
00:53:55:01 - 00:54:08:12
Hannah
But you could equally have turnover up, a margin up, a big problem in your overheads. Yeah. Yeah. So your profit after tax. So your net profit is going to be lower than you anticipated. Yeah. For snowballing subscriptions or whatever it is.
00:54:08:12 - 00:54:30:21
Chris
Well and subscriptions and interesting one for me that can have the effect they, they try to for want of a better word, seduce you into going with, an annual fee instead of a monthly fee. And when you do the mass, you kind of go, well, that makes sense. But that means I'm now paying that out. Then, where I've had those examples is where I've kind of forgotten that I've done those things come up for renewal next year, and I'm like, oh heck, I've got that.
00:54:30:24 - 00:54:55:05
Chris
And I've not done the bigger picture, and I've gone and bought something like, I don't know, a two grand, video editing computer or whatever it might be, and you go, wow, if I'd have bought that in month nine, zero problem over the year. And it's not a problem over the year, full stop. But because I forgot that I'm going to have all of this coming in, and I've done it in month three that's now caused me a problem.
00:54:55:05 - 00:55:12:12
Chris
I'm making all of these up in terms of details, but it's that point of the cash being aware of the movement of it through the year. You have to be aware of it because it doesn't mean I can't afford to get it. It could be the when when is the right time for me to do that.
00:55:12:14 - 00:55:44:14
Hannah
And that point. So imagine building on that and say you financed that. Okay. What happens when okay, that's the finance. And I think we buy assets because they are going to, bring economic benefit to our businesses. Right. That's why we buy them. They generate cash. But if you've got a finance deal on an asset and that asset doesn't generate you the cash in line with the erosion to your cash for the loan repayment, together with the interest, you may have a problem.
00:55:44:14 - 00:56:04:06
Hannah
If you're not already on a on an even footing and you have a cushion in that. So that software that I mentioned, the add on, that's a really, really good one because you can put in the investment of this piece of kit, whatever it is. I mean, we've got some clients, you know, who are into engineering and that it's like 400,000 pounds for one machine.
00:56:04:08 - 00:56:26:12
Hannah
Yeah, but what they can machine after, it's easier in a way, because you can measure the output a lot, a lot better, than, for example, video equipment, you know, because how many man hours does it take to then edit for example? But yeah, it's all about a visibility. And I'll take the opportunity to plug, something which I think is really important for all SMEs owners.
00:56:26:14 - 00:56:56:16
Hannah
There's a consultation going on at the moment with HMRC. There is some opinion that it's been somewhat under the radar, and what this consultation is, is for the revenue to be getting reporting like, regular reporting on director loan account transactions. Now, I have no idea yet what this, level of what the burden will be. Right?
00:56:56:16 - 00:57:16:27
Hannah
In terms of reporting. I'm not suggesting for a second that it's anything like making tax digital for that or for now, for MTD for it, so that we're in. I'm not suggesting that. I'm saying I don't know. I don't know if it means that, you know, the loan account transactions in a, in a, in the finance system need to be perfect and up to date.
00:57:16:27 - 00:57:40:07
Hannah
Then or if it actually means that there's alternative reporting in place, I'm not sure. But that's a really, really important for for SMEs. The beginning of this conversation you talked about, you know, directors possibly using the DLA quite significantly and or the business will cover it in the next month. It you know, it all goes back. Yes. That's really, really important for cash management.
00:57:40:07 - 00:58:10:27
Hannah
It is but with this new potentially after the consultation, this new level of reporting, that and I suppose that might actually be something for directors to really think about too, which would mean really, really tightening up. Okay. What income do you need every month. Because, you know, with all due respect to the revenue, the more you're putting through your DLA and the more you're abusing it, the more risk you have then of, you know, having an investigation, I suppose.
00:58:11:00 - 00:58:31:18
Hannah
But actually the risk is that you'll, you'll, it'll snowball. And next thing you know, you're having to pay section 455 tax, which is a deemed dividend tax. Very expensive. That's often where we can see trouble coming sometimes in terms of the these metrics when we see an abuse DLA and then unfortunately we go, yeah, is a tax bill for it.
00:58:31:20 - 00:59:01:04
Chris
Yeah. Which I mean you know almost changing the connotation there of abusing it is, is invariably it's by accident, you know, as far as the set up is that, that that's what I need, the minimum I need to take home. And the way that is accounted for is directors drawings after the basic salary and suddenly you lose a couple of retainers or something like that, and and this is where the cash bit became interesting, is that it was like going, oh, no, no, it's fine.
00:59:01:06 - 00:59:38:01
Chris
I can afford it's there. I can still pay myself what that was and then submit at the end of the year, you go actually that's, that's kind of that. And so there's a tax on it. But it wasn't a deliberate abuse of it necessarily. But it, it is as far as they're concerned isn't it. Yeah. Yeah. That's where the, the interesting balancing act, it never never gets easy which you know is a key thing that we've, we've shown here with this in reality is that by being as aware as possible, by being having it interpreted for planning for the here and now and to to report backwards on it as well.
00:59:38:03 - 00:59:53:10
Chris
It's absolutely vital. Yeah. We can be busy fools very easily. Yeah, very easily. But is it doing the right things in the right order at the right times. And we can only make those decisions when we've got everything in front of us. Yeah.
00:59:53:12 - 01:00:15:19
Hannah
I think I know that paying another subscription or paying increased fees to your accountant is just another cost, but I think you flip it on his her on its head in that it's actually an investment. And most of that actually is that is your time. Because I speak to lots of business owners and and I'm always asking, tell me what your time looks like.
01:00:15:19 - 01:00:46:23
Hannah
Like how much of a burden is this for you? Or if at all some people say they enjoy doing it? But often it's like, this is just too much happen for me. Yeah. And yes, it's a cost, but actually, if it buys you three hours, you know, every other day or whatever it is to go and put your feet up, watch his tenders, or be with your family, then it might actually be worth considering, especially when you've got the added value of having more control over your own life and business strategy.
01:00:46:25 - 01:01:11:21
Chris
Because that's the whole point, is that invariably we're working so hard that we're spending very little time on ourselves, on our family and it's just working too hard. And we have health considerations. We can now stress burn out all of those kind of things. And so to be able to get that balance back in check, is a goal that I think the majority of us, if not all of us, would invariably have it.
01:01:11:21 - 01:01:14:05
Chris
It runs away from us at the best of times.
01:01:14:07 - 01:01:32:28
Hannah
I think one thing not to be afraid of with this, for example, in turnover and margin, you might get to a point where you, you look at this video, you've watched this video, and then you've looked back at your own margin. Oh, that's not where I thought I was in my head. Okay. Well what do you do about that?
01:01:33:00 - 01:02:03:23
Hannah
Pricing is so, so important. But it's also really difficult. And I'm going to, quote our, our old MD, he retired a few years ago. He used to say to me, Hannah, sometimes it's an art, not a science. And personally, I'm pretty data based. So he and I used to. It you're going to have to cut this out.
01:02:03:23 - 01:02:23:22
Hannah
But he was he he was right in some instances, you know, in some ways and pricing. Yes. It's data driven. So we need to do a piece of work often and how to get there. But also it is a bit of artistic flair too. Yeah. And that's why it's important to put the accountant's head together, together with the business owner.
01:02:23:24 - 01:02:43:08
Hannah
Because you know your business, you know your clients, you know the environment, you know your external threats in fact, is and then we know the finance side. So pricing can be difficult. Do not be afraid to pick up the phone and talk to your accountant over. I did a really weird one last year, a year before. I won't say the particulars of it, but it was quite strange.
01:02:43:08 - 01:03:01:23
Hannah
It was really fun in the end. As I said, I am, it was really fun in the end, but what's what's rewarding for me is seeing that now pay doesn't. And that was a business where the director was on the phone to me, you know, actually hysterical that the whole thing was going to go down the pan.
01:03:01:25 - 01:03:16:19
Hannah
Well, and we sat and we did little exercises like this. We we did a few really, really effective things, which ended up actually what you've got now as a business, it's working really, really well. So don't be afraid to just pick up the phone.
01:03:16:22 - 01:03:42:07
Chris
Because I think we do often go too low on our prices, don't we? We don't have a confidence at the get go. I've had situations where I've been lucky enough for one of my other businesses, actually, and the importance of that business waned because of all the other things I was doing and the love for that after the pandemic challenges and things like that had gone.
01:03:42:09 - 01:04:10:22
Chris
It's probably the easiest summary of that one, which meant I didn't proactively push that. It was all on visual PR productions, that I was doing all the work because it's growing very rapidly. Suddenly I was getting an interest coming in for this other business, and because I was less desperate, I think is the word I'm going to use here for the business, because that really describes, I think, the mentality we have where we've got to get a business and therefore it needs to be lower.
01:04:10:24 - 01:04:18:20
Chris
I was happy to go with a higher figure and if they didn't go for it, it's fine. Yeah. I was getting yeses all the time.
01:04:18:21 - 01:04:19:10
Hannah
Yeah, you made.
01:04:19:13 - 01:04:38:06
Chris
Something and I'm like, how did that happen? And I always remember with this business in its early stages, somebody, a fellow business colleague turned to me and said, you're too low to double your figures on went. How can I do that? I'm struggling to get this off the ground. Now, you might double your figures and you will. And I know that sounds counterintuitive and head.
01:04:38:09 - 01:04:58:21
Chris
Surely the way that I get more business is being, you know, low enough to be attractive, but went for it because I had nothing to lose. It increased. And of course, I don't need to suddenly have arbitrary figures of 100 clients. I only needed 75 clients to get to where I needed to, for example. But it could be down to things like perception of your business.
01:04:58:21 - 01:05:01:20
Chris
What if it's cheap? What we're getting.
01:05:01:23 - 01:05:07:08
Hannah
Yeah. There's lots of entities for example, that are voluntarily registered to vote to appear larger than they are.
01:05:07:15 - 01:05:07:28
Chris
Yes.
01:05:07:28 - 01:05:28:09
Hannah
And start their invoices offer you know 500. What. Because to make it look like there's been a lot more generated before. You're right is perception. And pricing strategy is a really interesting topic. And if we think of what we see, something we'd all be familiar with, you know, thinking that you could low, go low and gain market share.
01:05:28:09 - 01:05:47:10
Hannah
Right. That's something called penetration pricing. So you go low and then you start to inflate. And if you think of Sian, for example, I don't know if I'm pronouncing that right. So cheap, you know, at your fingertips. And now ignoring the, ignoring the duty and everything like that. But and now you know that those prices, they are going up.
01:05:47:12 - 01:05:47:29
Chris
Are they.
01:05:47:29 - 01:06:06:11
Hannah
So yeah. Because they've got the users and they've got you there. Yeah. Yeah. And yeah, there's, there's quite a few good examples of that. So I mean, I don't know what Domino's were back in the day, but I feel like Domino's us Inc is so, so expensive. Yeah. Yeah. But that stuffed crust is just to die for you know.
01:06:06:11 - 01:06:13:27
Hannah
So if a voucher comes through the door and it's for X and I offer a file online on the app, you know, I'll buy it, I'll still be, I'll still be.
01:06:14:00 - 01:06:32:12
Chris
Because they've got you there. You've already tasted it. So, you know, it's, you know, it's worth it. And I think that that's a great analogy for business in general. Let them, if you choose the penetration because they'll say skim, it's the other one, isn't it, where you make it high and yeah, whatever else. But I know it's so interesting that you've got to be prepared to look at those figures.
01:06:32:14 - 01:06:55:18
Chris
And I've had an experience where someone made me think that my prices were too high, and I started questioning the other way and then looked around and went, no, they're not. And someone else was still telling me. I had several others that go, and you do realize that it could easily be more than that. And which is left in this challenge that going there's no right or wrong, is there?
01:06:55:20 - 01:07:18:18
Chris
It's about the value that it is to the people that are taking your product or service and about understanding what that is having confidence and belief in what it is you're providing and running with that. But there's still always going to be that. And that's where the bigger picture comes in that says, okay, costs are going up. So that's going to have even more of an impact now on prices than it ever has.
01:07:18:18 - 01:07:20:21
Chris
I think personally, absolutely.
01:07:20:23 - 01:07:44:23
Hannah
And I think what you demonstrated, just, aside from the points that you, this is entirely outlined, in your, you know, in your conclusion there, what you just demonstrated to every person watching this is how lonely being a business owner can be. Yeah, how isolating it can be. And your accountant should be your critical friend, too.
01:07:44:25 - 01:08:06:26
Hannah
You should be able you should get on with your accountant. I think that is clients. So I just hit the mike. I think that is client. I want clients that I get on with. Right. We don't have to be similar at all. It's better not to be. But some clients we can get on a level with. Right. And you guys need accountants you can be on a level with because that is what catalyzes good conversation.
01:08:07:02 - 01:08:30:25
Hannah
It breaks down barriers, and all of a sudden we learn more about one another and we can do more with each other and trust. Exactly. And all of that underpin is underpinned by that trust. So business owners, there's no need to be say, there's no need to be lonely. It is inevitable because you're entrepreneurs, but your accountant is someone you can.
01:08:30:25 - 01:08:41:02
Hannah
You should be able to bounce all of these thoughts off by having these, you know, little short meetings with them or whatever arrangement it is that you have. They're really they're really important. Yeah.
01:08:41:04 - 01:08:42:10
Chris
I agree, I agree.
01:08:42:16 - 01:08:43:25
Hannah
It's tough at the top as they say.
01:08:43:26 - 01:08:59:15
Chris
So me is certainly. Yes, I used to have hair. That's not true. It's not. It's I do that. So you'd be surprised. No, I had a full head of hair and it would curl outwards. Bizarrely, I don't believe. Yeah, I did okay, I'll have to bring photos in to show you that.
01:08:59:18 - 01:09:04:15
Hannah
I think we have a saying tough at the top is is what a rub sticks is favorite. And is it shite slides downhill.
01:09:04:16 - 01:09:07:21
Chris
But yeah, very very like.
01:09:07:21 - 01:09:09:15
Hannah
Fight in a way.
01:09:09:18 - 01:09:31:00
Chris
Okay. A key message for this one though is, yes, we're always going to be busy. But it needs to be managed busy, not busy falls. And there are the four key metrics turnover, which is the probably the easiest one because you sat there going, well, I know that. I, you know, the sales are going to be this and we get up there fine, but we need to look at gross profit.
01:09:31:03 - 01:09:52:21
Chris
But I think we probably ignore net profit too much. That needs to be looked at more. But at the same time, yes. Look at that cash. Don't focus on cash only because cash is not automatically king. However, don't ignore it either because these could be looking good, but at the time it could be off. So that needs to be very much manage as well for key metric metrics.
01:09:52:21 - 01:09:59:16
Chris
All together we can be aware of it ourselves as business owners, but you guys really can paint that picture for us. Even better.
01:09:59:19 - 01:10:11:03
Hannah
And turnover as vanity and profit as sanity. Never ever look at turnover without looking at your profit. That's margin. Whatever it is, I let my words ring in your brain.
01:10:11:10 - 01:10:25:12
Chris
Absolutely, I get it. The it is the turnover, the bit that we might shout even in marketing or whatever else or to investors, but the investors will be asking us about. Yeah. What does that really mean, I get it. Have we covered everything that you wanted to kind of think?
01:10:25:12 - 01:10:26:02
Hannah
So unless you haven't.
01:10:26:03 - 01:10:57:20
Chris
We could carry on talking for ages. I know there's so much more, but thank you so much, for for explaining all of this to us an awful lot more that people could do and for and specifics, of course, for everybody. And the biggest advice opt stock. Co.Uk reach out, get in touch with you guys and have those conversations, whether that's existing clients that suddenly realize they probably haven't had enough two way conversations with you to get in touch, or people that aren't yet clients, to to speak with you slowly.
01:10:57:22 - 01:11:13:21
Chris
Well, Hannah, thank you for your time. Thank you for joining us. I hope it's been useful. Might be, even more questions that have been created. As I say that, but reach out and the team will be able to answer those for you and find out what's the right way to go. But all the very best for now.
01:11:13:21 - 01:11:16:03
Chris
We'll see you in the next episode of Optimum Life.