Often when starting with a client I’ll ask some basic questions like “what was your turnover last year?, what’s your gross profit margin?, what’s your monthly budget for the next twelve months? and there seems to be two camps… One camp that relies on the accountant at the end of the year to tell them whether they’ve made a profit or not and the other camp where the business owner has a good handle on the numbers, but then there is a question of whether they can influence the ‘outcomes’ of these numbers. Consider the following:
Turnover is vanity, profit is sanity!
Having a large turnover doesn’t mean much if it’s accompanied by a relatively small profit margin. It may seem like your business is doing well if you can say you have a high turnover but at the end of the day the sanity of the business is dependent on how much profit your endeavours leave you with. By knowing the numbers it becomes easier to identify where exactly you can decrease costs, where you need to increase prices and what your break even turnover is.
Build the KPIs that are most important for your business to be successful
Every business has different Key Performance Indicators that influence the growth, profitability and overall success of the business. Not knowing these KPIs could mean that you’re “flying by the seat of your pants!”
Some of these include:
- Productivity e.g. Hours charged out versus hours paid to staff
- Wage to Turnover ratio
- Profit margin
- Weekly, Monthly and Cumulative Turnover (against forecast budget and previous year)
- Transaction size (Average $ sale)
- Growth (or decline) by Revenue stream
- Client percentage i.e. the percentage each client represents against the overall business (no client should represent more than 30%)
- Database growth
- Marketing spend % relative to turnover.
Have a dashboard that reports to you weekly so that you’re constantly in touch with those KPIs
Building the reporting mechanisms that will give you information is one part of the process but using this information on a weekly basis is key to driving change in the success of your business. I used to turn up to work with 14 retail stores and within 10 minutes I knew whether I needed to worry about any individual store. My dashboard reported the turnover against budget, the overall gross profit, the wage to turnover ratio and the workshop labour. If these were all reported in green I could move on to the next store, if an area was highlighted red then I could drill down for more information (for example if a product had been sold at cost it would be highlighted, though it may have been dead stock and a good selling decision). If all stores reported green, I’d be back to working and focusing on business growth and profitability, rather than being bogged down in the workload that any business owner can be dragged in to…..
Having a good handle on your numbers will put you in a much better position to influence the outcomes of your business. For business owners, It’s important to stay focused on what’s affecting your profit, as well as defining your KPIs and making sure you have a mechanism that keeps your KPI tracking simple and visible.
Want to get a better grasp on the numbers affecting your bottom line but don’t know where to start? Arrange a time to speak with Nigel Letty and get to know your numbers better today.
– Blog by Nigel Letty