Understanding the figures
Any business owner that doesn’t have a good grasp on their figures is lining themselves up to fail. In this article we will focus on the correct figures to look at in order to assess the health of your business and importantly, how you should move forward and use the knowledge gained from your figures to make informed decisions.
Keeping an eye on your figures is all part of being proactive in business. It’s the theme we started with in this series of articles and it’s a theme that should run through everything you do as a business person. Before we crack on with this article don’t forget you can see my previous article on Social Media in Business.
The headings below will make up this month’s article. You can select any one of them to take you straight to the section which interests you most.
- “Turnover is Vanity – Profit is Sanity”
- Understand the Impact of Not Managing Your Gross Profit
- Work to Two Sets of Targets – Turnover and Gross Profit
- Understand the Past to Shape Your Businesses Future
- Make Your Sales Team Commercial and Make Them Focus on Gross Profit
- Spend Time Working On Your Business As Well As In The Business
- My key tips to managing your figures to ensure business success
- See you next time
“Turnover is Vanity – Profit is Sanity”
I have met many business people who say this without practicing what they preach! Most sales people love to brag about how good they are or about how much they sell. Occasionally business owners are also guilty of this. Out of context however, bragging about your sales volume is meaningless. Unless you are increasing your profits, your business will struggle to grow. I can spot a business owner who’s honest with themselves from a deluded one by questioning them on their profit and what growth they have had within their gross and net profit lines over the last two years. You can sell millions of units but if you aren’t making gross profit, you’re kidding yourself!
Understand the Impact of Not Managing Your Gross Profit
Most of the SME’s who approach me blame lack of sales for a downturn in their business performance. In 60% of cases this is true but in 40% it’s to do with cash flow issues. I have come across a good deal of businesses in the last year who are maintaining the level of turnover but their cash flow is not up to par and therefore their gross profit suffers. A knee jerk reaction would be to suggest that customers are not paying on time but digging deeper will highlight it’s caused by high costs! Many companies do not actively manage their pricing nor do they monitor their gross profit which can lead to disastrous effects on their business. Over the last 3 years many customers have increased pricing due to fuel charges, European and World conditions but if you as a business are not monitoring this you can be doing the same amount of sales but making less profit per deal.
Get to grips with your pricing or you may end up increasing your turnover while reducing your gross profit margin and this can make or break your business.
Don’t do deals that don’t make you money! This comment sounds stupid but it’s a fact in business. Some of the best deals I have ever done are the deals I walked away from. If there’s no profit in the deal, I’m not interested. It’s not greed it’s good business sense!
Work to Two Sets of Targets – Turnover and Gross Profit
When setting your annual sales budgets my advice is to focus on the following information:
- Unit sales per month
- Turnover per month
- Gross profit per month
Active management of your company’s performance against these financial indicators is crucial and if done correctly will highlight under performance issues for you to address.
Understand the Past to Shape Your Businesses Future
I believe that in order to understand your business fully you must know your numbers. How I educate myself in other people’s business is to start by tracking back the 3 financial indicators listed above
since over a three or four year window. I break it down on a month by month basis and keep it in a simple spreadsheet format.
Doing this allows me to understand the performance year on year; it helps me to identify peaks and troughs in activity and helps me to shape future targets and budgets.
Make Your Sales Team Commercial and Make Them Focus on Gross Profit
If you employ a sales person or a team you need to make them commercially aware and not just order takers. When I train people on how to sell, I teach them the importance of understanding averages per deal in turnover, gross profit percentage and volume. Good sales people can produce a lower number of unit’s sales, while maintaining the average turnover but increasing the gross profit per deal. The idea is doing less but making more! This leaves them more time to spend drumming up new leads!
Spend Time Working On Your Business As Well As In The Business
You don’t have to have an MBA to understand the figures in your business, you need time! If you take my advice on board and spend a few hours mapping out the historical business performance it will only take you an hour a week to review how your business is tracking real time.
My key tips to managing your figures to ensure business success
- Make at least 3 hours per month or an hour each week to review your figures
- Track monthly Unit sales activity
- Track monthly Turnover activity
- Track monthly Gross Profit activity
- Benchmark the above figures against your budget to establish how the business is doing year to date
- Benchmark the above figures against the 2011 and 2012 performance to establish how the business is doing year on year
- If the business is underperforming against the gross profit targets set do something about this! Hold your Gross Profit margin where you can and incentivise your team to do this
- If the business is underperforming against the turnover targets set but you are ahead on gross profit this will allow you to reduce your margin to gain more deals!
- Remember my number one business tip! Be Proactive in 2012 as growth does not come to those who just wait for it to happen!