Coaching! 
MANAGING NUMBERS
WHAT CAN MAKE OR BREAK YOUR BUSINESS
Personal sales ability is by far the number one skill required for small business success. If you can’t sell your products or services, you will have no revenue and your business simply won’t survive. End of story. Once you are generating sales, however, the next skill you must master is understanding the numbers of your business. How well you grasp and process the financial realities of your situation will likely dictate whether you stay in business at all, remain a one-person shop or grow a viable and sustainable business.
Once you are bringing in sales, running a one-person shop is not that difficult. The formula for success at that level is basic hard work: You generate sales, perform the work and make a net profit. Without employees or payroll, your only investment is time, not overhead. Since you are doing everything yourself, you are in charge of sales, quality control and efficiency.
There is a price to pay to remain a one-person shop. There is never enough time to get everything done, and from the simplest chore to the most complex, you have to do it yourself. There is little or no security, either. If you get sick or lose a big customer, the business could fail. The other downside is the loss of potential: The multi-tasking required of a one-person business means you frequently aren’t working at your highest skill level. And, of course, working at your highest level feels the best and pays the most.
This is all about quality of life, the reason most of us went into business. We wanted to create our own world, one that felt secure, delivered job satisfaction and an excellent income. An added bonus would be the time to pay attention to family and needs outside of business. Within you is the potential to be able to reach all of those goals, though that reach will be limited by your ability to build an organization.
Building an organization requires deepening your existing skills and developing new ones. Running a one-person shop required only compulsive behavior. Running an organization requires managing sales, gross profit, employees, fixed expenses, net profit and cash flow. Most importantly, it demands you manage yourself. Everything else flows from that ability.
SUCCESS BY THE NUMBERS
We advocate a “Success by the Numbers” approach in managing yourself and your business. Understanding the numbers should be the foundation from which all your management decisions flow.
Making a net profit allows one to achieve both business and personal goals. That’s why the most important number in business is net profit — the sum of the component parts of your business. Successfully managing each component part should result in net profit. If you are unsatisfied with the net profit, an analysis of each component part will indicate where changes must be made. In turn, knowing where changes need to be made will highlight the knowledge and skills you need to develop in yourself and your employees. Let’s take a look at a recent real-life example of how one of our clients is implementing a “Success by the Numbers” approach in his business.
Our client is a retailer who sells to the general public, and he always made money as a one-person business. In the last two years, his business has grown to five employees. Unfortunately, he now works harder, makes less money and has more headaches. When we first met him, he felt his business was out of control and often thought of going back to being a one-person shop.
Our client didn’t feel in control because he didn’t understand how the component parts of his business fit together financially. He is a great salesperson and deals well with the public, but spent a lot of his time running around putting out fires. His employees never seemed to get their work done and he found himself constantly fixing their problems. As a result, sales suffered and he always ended up hunting for cash to pay the bills. Is it any wonder he often dreamed about going solo again?
BREAKEVEN POINT
After analyzing his business from financial and operational perspectives, we sat down with our client and suggested he run his business from a “Success by the Numbers” approach. That starts with understanding the “Breakeven Point” of the business: The amount of sales required to cover cost of sales (variable expenses) and the fixed expenses of the business. Fixed expenses include the salary and the profit goal of the owner.
The “Breakeven Point” formula is:
Sales minus cost of sales (variable expenses) equal gross profit. Gross profit less fixed expenses less the profit goal equals zero.
Let’s assume an average sale is $1,000. The average cost of the product is $600. Therefore, the average gross profit is $400, and the average gross profit percentage is 40 percent.
If your fixed expenses are $20,000 per month and your profit goal is $10,000 per month, the total equals $30,000 per month.
Therefore, the X factor (sales amount) is $30,000 divided by 40 percent, or $75,000. Let’s prove the formula.
$75,000 in sales multiplied by 40 percent equals $30,000 in gross profit. $30,000 in gross profit less $30,000 is zero. Your sales target therefore, is $75,000 per month.
Taking a “Success by the Numbers” approach means you need to make an average of 75 sales a month at $1,000 per sale with a gross profit of 40 percent. You need to maintain fixed expenses of $20,000 per month and you need to make sure that all of the work gets done within that $20,000 budget.
Let’s get back to our real-life client and take a brief look at the critical component parts of his business.
First, we sat down and reviewed his fixed expenses. He actually had only a vague notion what his fixed expenses were and what it really cost him to open up his doors every morning. We included in our analysis every fixed expense, ranging from salaries and payroll taxes to office supplies and bottled water. We also included a breakdown of the number of hours worked by each employee.
THE MAGIC ANSWER
We next analyzed the gross profit percentage. We asked him what he thought his gross profit percentage was and his response was 50 percent. We determined that his gross profit percentage was actually closer to 37 percent. Even though the business did earn a 50 percent gross profit on many products, it earned a lot less on some big-ticket items. That 50 percent gross profit was the goal, but it wasn’t the reality. Since his average sales were about $100,000 a month, that 13 percent difference in gross profit meant a $13,000 difference in net profit per month. You can guess that we now had his attention. He was beginning to find his own “magic answer.”
Before we go on, let’s look at the business components he must manage in addition to himself:
- 1. Sales
- 2. Gross Profit
- 3. Employees
- 4. Fixed Expenses
- 5. Net Profit
- 6. Cash Flow
Here’s how we helped the client deal with the different component parts of his business:
SALES
He needed to understand what it took to reach his sales target. We asked him to start counting the number of people who came into his store, how many actually made a purchase and the average dollar amount of each purchase. He started to think about how to bring more people into his store, how to get more to actually buy something and how to increase the average size of each purchase. He visited his competitors’ stores and learned a lot about how to improve his own sales. We also brought to his attention the idea of “Up Selling” his customers. For example, turning a repair item into a sale of a new product.
The sales numbers of his business are now the baseline from which he measures and, more importantly, makes decisions from. For example, he now measures in real dollars the success of a particular marketing program.
Just the awareness of the numbers of his business sharply improved his thinking. Awareness of the problems is at least half the battle — once you correctly identify problem areas, you can immediately begin to fix them.
GROSS PROFIT
By knowing what his real gross profit percentage was on different items, our client started paying closer attention to what was causing the differences. He realized he had gradually changed his mix of business from mostly retail and some wholesale to about equal parts retail and wholesale, giving up gross profit percentage to keep the volume up. He made a decision to go after a more retail market and boost his gross profit margin.
He also noticed he dropped his prices at the first hint of resistance in order to make a sale. He had unconsciously gotten away from his vision of offering superior quality and custom design work in favor of lower prices. He quickly realized he had to either go back to his original vision or provide less service and emphasize low price.
Being aware of his gross profit percentage also caused him to “work” his vendors harder for better pricing.
EMPLOYEES
Our client now had a much better understanding of how the cost of his employees fit into his fixed expense total. He knew how many hours were budgeted for each employee and that became his baseline to measure the productivity of each employee.
That baseline includes the quality and efficiency of each employee as well as the reasonableness of the workload. For example, his budget allowed 20 hours for the employee who expedited outside repairs. He could now measure whether that workload was too much and whether he was actually working hard and smart.
He started thinking about how to develop better ways for his employees to accomplish their tasks and maintain better focus. He noticed that one employee was taking too many personal calls during the day, so it became a policy that personal calls were not allowed except in an emergency. He also set up a binder for the employees to track the status of each job, so they wouldn’t waste time trying to track it down when a customer called.
FIXED EXPENSES
Here’s why managing fixed expenses is critical to every business: Let’s say a small business averages net profit of 10 percent of sales. If you increase your fixed expenses by $1,000 per month, you must increase sales $10,000 just to maintain the same net profit margin.
It is easy and fun to spend money and our client had gotten into the habit of buying things that he liked to have in his business, without regard to their real cost and bottom-line effect. Being aware of how his fixed expenses affected his net profit caused him to be much more careful about spending money.
NET PROFIT
The management of net profit takes care of itself if the above components are all properly managed.
CASH FLOW
The management of cash flow is different from the management of net profit. You need to manage both to stay in and grow your business.
Our client spent way too much on inventory. He couldn’t pass up a good deal. Since his sales were averaging roughly $100,000 a month and his average cost of sales was 63 percent, he should have been buying $63,000 of inventory per month to keep pace with his sales. Any purchases in excess of that amount meant that he was increasing inventory too much and tying up much-needed cash unnecessarily.
Awareness of his monthly inventory needs caused our client to change his buying habits. He became much more of a critical thinker when he made buying decisions.
We also developed a software spreadsheet for him to track his cash-flow requirements. This cash-flow spreadsheet included weekly projections for the next month. This spreadsheet helped control our client’s habit of making unplanned cash expenditures and motivated him to hit the sales goals necessary to make his cash-flow projections.
OUR CLIENT’S RESULTS
Based on our work together, our client has set the following goals for next year: Increase sales by 20 percent, increase gross profit by 7 percent, reduce inventory by $100,000 and reduce expenses by 15 percent. With our help he is also designing and implementing work-flow systems to improve employee productivity.
Though this remains a work in progress, if he meets his objectives — and we both expect he will — next year his business will see a net profit increase of $80,000. And that is just the start!
The bottom line is that our client has renewed hope and energy for his business and now feels that with proper planning, he can take his business to the next level. He no longer fantasizes about being a one-person shop and finally feels like he’s living his entrepreneurial dream.
THE BOTTOM LINE
There’s a lot to digest when it comes to managing the numbers. It may be overwhelming for some of you. We understand and are here to help. It can take several months to understand how the component parts fit together in terms of managing a business by the numbers. However, if you are committed to understanding the numbers and are willing to venture outside your comfort zone, the numbers will make sense if you stick with them.
An argument we often use to help clients improve their business is to point to the competition. For example, when we hear a client complain that employees are impossible to manage, we simply point to a competitor with more employees and a successful track record to show that it can be done and the answers are out there. We can help you find them.
We will do the same thing with managing numbers. We all know people that are very successful in small business. Ask those people if they understand the numbers of their businesses. Almost without exception they do. Many of them didn’t understand their numbers at first, but they learned over time, sometimes the hard way. If you are patient and make an honest effort, you will develop the understanding necessary to achieve and sustain small business success.
We are committed to help you achieve just that by guiding you to implement parts or all of the Complete Small Business Solution. If you are interested in discussing how we can help, please review Our Coaching Program for more details.
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