Calling all over-worked, superhero business owners! Take a moment and use these lazy days of summer for going to the pool, fishing, sitting on the porch with a cold beer and taking a dive into your financials!
Your bottom line funds your retirement, your family vacations, your kids’ college, your home.. wait a minute… everything that is important to you is taken care of by your bottom line. While all business owners (myself included) love to brag about our sales, our bottom line is the true unsung hero of our lives. It deserves our most ardent and enthusiastic attention.
Here are 7 questions to help diagnose what ails your bottom line.
- What is your net income as a percentage of sales? This tells you how much of every sales dollar you make you actually get to keep.
- Is it 1%, 20% or somewhere in between?
- How does that compare to your industry? Remember that industry data is an average and unless you think of yourself and your team as average, you should set your goals well above average.
- Take out a dollar bill. Next get the amount of change that represents your bottom line and lay it next to the dollar bill. Does that make your happy, sad, or indifferent? Does it make you proud, angry, or maybe in confused?
- What is your gross margin? This tells you for every dollar of sales, how much is available to pay your administrative and overhead costs and leave a bottom line.
- Is your industry a high margin industry like most service businesses or a low margin industry like most distribution firms?
- How does your margin compare to your industry?
- What is the value of your business, if you sold today to a willing buyer paying fair value? This tells you what your business is worth as an asset on your personal financial statements.
- What is your net after tax value of your business? Meaning, after taxes what would you take home from the sale of your business?
- What is your net income as a percentage of the after tax value of your business? This tells you the annual return from your investment in the business.
- Does this seem like a fair return given the risk you take on a daily basis within your business?
- What is your margin per labor dollar? Compute this by taking total sales, subtracting non-labor cost of goods sold and dividing the result by total labor. Total labor being direct, indirect, sales, admin. Regardless of how you classify labor on your financials for this purpose, it is all just labor. Your margin per labor dollar tells you how many dollars your labor investment is producing. Rare is the business that can thrive at $2 or under. $3 is treading water and above $3 is thriving.
- Common size your income statement by taking every category (using broad categories like gross margin, sales and marketing, facility, office, etc.) and dividing it by sales. In a common size look at your financials, sales are $1.00, and everything else is some portion of $1.00.
- Now that you have these basic metrics, compute them for the last 3 years and for the last 4 quarters.Are they trending positive or negative?
Now that you have good data to start your profit improvement plan, begin by changing the lens through which you see your income statement and net income. Instead of seeing net income as what is left over, think of net income as a result you and your team are creating every day with every decision you make.
With this new lens, net income is what you create every day with every decision you make, do any decisions pop out that need your attention?
Let’s go back to my prior example. If your gross margin is $.30 and your sales and marketing costs are $.20, what decisions need to be addressed? Clearly $.10 is not enough and will never be enough to cover overhead and provide a reasonable return. This means selling more is not the answer. Here are some other kinds of decisions to consider:
- Are you selling the right products or services? What are your current customers asking for that you aren’t providing?
- What about your sales mix? Are their better margin products that you already sell but could sell more? Can you add or create a value added product or service? Does your business lend itself to a maintenance plan of some type? Are you selling below industry margin? Why? Can you raise prices without diminishing sales? Can you raise prices and by letting the low margin customers go make more money?
- What opportunities exist to reduce your cost of good sold by improving production efficiency?
- How can you improves sales and marketing efficiency and lower your sales and marketing cost?
If this seems like just too much work, reflect on this:
The pace at which you move your business forward is directly proportional to the clarity of the path you create. The right data is like fuel to your team. It tells you what path is blocked and what needs your attention, now. By measuring this kind of data on a regular basis, you will always know what questions to ask, what decisions to change and what path to clear.
It is my wish that you find my blog useful. If you find this information helpful, please let me know. If you have questions you want answered, please email me or contact us through our new website. Along with the incredible talented team at Mackey Advisors, I wish you a prosperous summer and 2017.
To your prosperity,