I recently met up with a despondent business owner. We shared a coffee and he told me how after showing his accounts to another Finance professional, he was met with the deep intake of breath normally associated with your local car mechanic, after lifting the bonnet of your car.
He had actually sought some professional advice as he was quite fed up with his business. After running it for 9 years, he was, in his own words, ‘fed up of being poor!’ He was looking to try to sell his business and start out again. No chance, I am afraid and he was advised not to show his accounts to anyone!
It is a shame, and I meet a lot of business owners who have followed this path.
From our discussion I found 3 golden nuggets of information I was able to share with him. As it is Xmas, perhaps these may also help you and that would be great at any time of the year. As you leave the office for the Xmas break, has the excitement of building your own business now turned to weariness, frustration and just a general feeling of ‘I’ve had enough’?
Here are my 3 golden nuggets, perhaps these may help you.
- He had an admin staff inputting his monthly data into the accounting software. Unfortunately they didn’t understand the need to phase and ensure the timing of the costs and sales. He was looking at the monthly profit and loss report but actually this didn’t give the correct picture of activity that had happened in the month. The sales figures needed to be aligned correctly against the costs associated with generating these sales in the month. He also had no one overviewing the accounts. This was important to ensure that any manual adjustments to allow for mistiming’s were made. He was therefore looking at poor, incorrect data. Often looking at poor data is actually very stressful. One month you look like you are doing well, the next month you are performing badly.Its a roller coaster of emotions and underlying this is one of doubt.Stop doing it to yourself!
If you are going to look at your monthly accounts, at least ensure they are correct. Otherwise, don’t look at them at all!
- We looked at the last 5 years of performance and we could see a time where he was once quite profitable. Being able to pinpoint the year where his gross margin fell by 10% was an eye-opener to him as he could relate this directly back to when he started to employ staff in order to expand his business. These staff charged their hours out to customers at an hourly rate 3 times as much as they cost. However he had not ensured that they charged out enough of their hours in a week to maintain the gross margin.
Tracking your data month on month will flag to you, at the time when your margins and profit move on downward trend. This will give you time to adjust and look at the situation in its live state. Leaving an unprofitable situation to persist will inevitably result in cashflow problems eventually so catch it early.
- This business owner did have slightly high overheads, however I asked him to suggest where he wanted to take his business in terms of turnover. He said he used to think he wanted to be at approximately 3 times the level he was currently running at. Over the last 3 years he had lost that desire due to the low profits and the hard work it felt running at the current level of turnover. We established the sales demand was out there. He felt held back only by capacity and the need to recruit further chargeable resources. Having now explained to him how to grow his gross margin I also showed him that by doubling his sales volume he could be making some good money for himself. Unfortunately at his current level of sales, he was barely past his breakeven sales rate. If he could increase his gross margin as well as push his sales figure up (whilst maintaining his overheads at their current rate) more profit would drop straight through to his pocket.
Once you’ve covered your overheads more profit per £ hits your bottom line and your pocket. Use this to motivate you to push forward.
So there we are, a much happier, optimistic business owner. Hopefully a business which will grow and prosper for many years to come.
Merry Xmas to you and I look forward to sharing further tips with you in 2016!