Is your business focus 20/20?
By Dean McArthur
Marketing without a clear focus and plan, knowing your costs, and who you are is like trying to see the fine print without your glasses. Give yourself the best chance of success with a strong strategic plan and implementation program to achieve your goals.
The best way to get started is to focus on three simple areas of your business:
- Knowing your numbers.
- Having the right people in place.
- Staying true to your target market.
When these areas work together in a strategic plan, you can market your business cost-effectively and successfully to the correct customer.
We see so many new clients who think if they increase their sales, they will be profitable. And while sales are important, increasing sales won’t always make you profitable. It comes down to getting your house in order so you can properly and successfully operate your business to generate positive net cash flow, a great culture and achieve your written goals.
*NEWSFLASH* – Your vendors, mortgage company, supermarket, utility company, etc. don’t care how good you can refinish stone, paint a house or make pizza. They want your cash or you don’t get their products/services. That is one reason you need to have a strong, positive net cash flow.
Nothing but Net
It doesn’t matter whether you have sales of $1,000,000 or $200,000, positive net cash flow is the most important part of running a business from a financial aspect. We see new clients who generate millions of dollars in sales and are broke. This is usually because their cash outflow is greater than their cash inflow. We also have clients who generate a reasonable amount of sales, create positive net cash flow and enjoy a nice personal life. Start thinking how much did I “NET” not how much did I sell.
If you have a strong understanding of your numbers, you should be able to have a close estimate, off the top of your head, for the following questions. When you are going through the list, we suggest you write the answers down and then compare them to your actual financial statements. If you are like most of the new people we work with, you will be very surprised by what you find.
- How much are my personal expenditures per week, month, etc.? If you are not already taking a check to cover your personal expenses, start now. Your tax structure will determine how to record your check. Don’t forget to have the taxes withheld or pay your quarterlies. Your partner (the Government) will want their share of your earnings.
- What are my costs of sales per hour, day, week, month, year? These are all the expenses it takes for you to do your job or make a product. I suggest having a spreadsheet for each project. These costs include supplies, true employee costs, machine costs, etc. Most clients find out that a $1,000 job isn’t very profitable when they add all their costs needed to do that job. For example, product costs of $200, 2 employees at $600 a day, van payment of $1,000 a month, gas, tolls, that $2,000 machine you use will 100 hours a year in a simple term costs $20 per hour. If it will last 200 hours it will cost you $10 per hour, etc. Knowing these numbers helps bid jobs, invest in equipment and is crucial to helping you identify where you are going, the employees you need to get there and which client is right for you.
- How much does each employee cost per hour, day, week? Don’t forget to include benefits, taxes, downtime, insurance, driving to get supplies, etc. An average employee only generates revenue about 70% of the time they work. This means if your employee costs you $30 per hour, they really cost you around $43. This isn’t even counting overtime costs. To generate an employees estimated costs, take your employees’ W-2 amount, their workers compensation costs, health insurance costs, and any other money or take home costs (van – if they can take it home -, gas, etc.) that you give them and divide by the actual hours they worked on a revenue producing project. This will give you a more accurate number of their costs per hour. We find people are amazed how much it costs to run and get those supplies instead of having them stocked and ready to go in the morning. If it takes an hour to run and buy a $5 roll of tape it just cost you $50 for that tape. And, that isn’t including lost revenue from no productivity.
- What is my gross profit, both dollars and percentage, per week, month, year, etc.? These numbers give you a great rolling benchmark how much you make on all your projects. I strongly suggest breaking them out by sector, or better yet, by client and sector.
- What are the 3 most profitable services or products that I offer? This is measured by your gross profit (dollars and percentage). This is your sales less your cost directly related to those sales (see item 2.). We find this opens a lot of eyes for people that try and do everything their customers ask. Buying that $2,000 piece of equipment you will rarely use to perform a $1,000 job may not be a good investment. Plus, if you are hired because you are high quality, it is nearly impossible to be great at everything, and you could risk your reputation.
- How much cash does it cost me each day whether I work or not? Not expenses, but actual cash. Your cash flow overhead, including fixed payments for vehicles, equipment, loan payments, rent, etc. already puts you behind before you even start your day. You will want to know what that amount is to ensure you are bidding correctly.
- How much are my fixed payments per week, month, year? Sometimes these are not in your income statement numbers. This is especially true for equipment payments that are not leased, line of credit payments, etc. These are part of item 6.
- How much was my net profit for 2019? This is how most people judge if they made money or not. Even though it is a good benchmark to judge a company’s success, it does not reflect how liquid a company is to operate on a daily basis. The government loves to see you have a nice healthy profit because this is how they get to reap the success of your hard work, whether you have cash to pay them or not.
- What is my net Income as % of sales? Not discounting numbers, but I really like to use percentages as benchmarks of how much better or worse you have done from prior periods. Increasing and decreasing as a % of sales really shows the impact you have had with the decisions you have made.
- How much was my net cash flow per month and for the year? This is different than your profit. This is the actual amount of cash (liquidity) you have left over (or not) after you not only pay your operating expenses, but also the inflows and outflows that are not reflected on your income statement like loan payments, loan receipts, owner draws and borrowings, equipment investments, etc. A cash flow can be loosely described as when your income statements meets your balance sheet.
Your 20/20 Vision
Knowing your numbers impacts more than just your ability to identify where you are gaining and losing money. They also determine:
- Which clients you are going to serve.
- What type of employees you need.
- If you should hire more employees or downsize.
- Your pay structure and how much you’re going to compensate your employees.
- Which projects and services you should offer.
- How much you should charge for each service.
- How much you should spend on marketing and who to market to.
- What is the return on your:
- Equipment investment
- Marketing investment
- Employee investment
Hopefully, you understand how important knowing your numbers are to running a successful business. If you don’t know your numbers, more sales can actually cause a company to fail faster.
A word of caution for those who ask others in their industry how much they charge. Just like a gambler, very few people talk about how bad they are doing or the jobs they lost money on. You only hear the wins. We are on a lot of message boards and are amazed how many “millionaires” there are in the service business. They brag about how much they get for a job and when we quickly add up the numbers, they must be netting hundreds of thousands of dollars a year. The truth is, a lot of them can’t pay their business bills let alone their personal obligations.
If you know your costs, it doesn’t matter how much others charge or say they make. You know what you need to be profitable and pay your bills. If the market does not support how much you need to charge to be successful, at least you know the areas (increase efficiencies, decrease overhead, target markets, product lines, etc.) that you will need to change to be financially successful.
For more information to help you become successful, we suggest you read our article Are you hoping for success or planning to succeed?
Learn more about yourself with a six minute questionnaire. To begin your strategic roadmap, take this free Personal Assessment. It will help you understand who you are and your qualities that will lead you to your success.
Dean McArthur CPA, SHRM-SCP is a strategic transformation coach who has started, consulted, bought and/or sold hundreds of businesses over the last 30 years. He is also a Certified Public Accountant, Senior Certified Professional in Human Resource and a Certified Talent Optimization expert. He can be reached at firstname.lastname@example.org or via LinkedIn at Dean McArthur.