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.

  1. 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?
  1. 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?
  1. 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?
  1. 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?
  1. 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.

 

  1. 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.
  1. 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,
Mack­ey