Business Is A Numbers Game
Unless you are an accountant, it is unlikely people go into business because they love numbers.
They go into business because they have a passion, a saleable skill and a driving energy to be their own boss. But like it or not, owning a business means paying close attention to the numbers accountants love and the rest of us often struggle with.
“I don’t understand. I’m so busy. I’ve made lots of sales, yet I’m struggling to pay my bills.” Does this sound familiar? If it does, then read on.
When first starting in business, it’s extremely easy to get caught up in the excitement of selling and money coming in. If the numbers are not closely watched, it is very easy to fall into the abyss of overspending and suddenly realising the money is just not there.
Many believe that if they buy goods for $10 and sell them for $15, they make a $5 profit. WRONG! There are things called hidden costs. These are the costs a business has without even opening the doors. They include items such as rent, insurances, stationary, administration systems, financial fees, vehicles costs, phones/internet, subscriptions, wages, packaging and the list goes on. These are the basic structures and physical systems needed to run a business on a daily basis before a sale is even made.
Where many fail in business is not recognising both the direct or actual costs of goods and the indirect costs as identified above. Many misunderstand the difference between mark-up% and gross margin%. A mark-up percentage of 50% does not equate to a margin of 50% per cent. In fact a 50% mark–up is generally equal to around 33% gross profit. That’s a huge difference in what a business is actually making to what they think they are making.
A good place to start is to have a simple cash flow chart measuring all the incoming and outgoing costs. Setting it up in cost sectors such as admin, stock, transport, wages and rent, makes it easier to analyse where the money is going. This chart is a quick and reliable indicator of which areas the spending is in and if the business is making or losing money. This will enable prompt action to address areas of concern.
Keep on top of the stock. How long does stock take to turnover? What is the cost of storing it verses the cost of smaller shipments?
What does it cost to acquire a client? Who is the ideal client for this business? Take into consideration marketing costs especially promotional material, giveaways and discounts. Keep clear records so a history is built up of what’s working and what’s not.
What are staff costs per day? Are they generating sales and work that covers their gross wages, including super and any fringe benefits? Do they have measurable daily targets to meet? Keeping staff on track and motivated will help to increase productivity. Discuss targets and reset them weekly if necessary. What about daily, weekly, monthly and annual targets? It’s important to have calculated what is needed to sell to cover the daily running costs. Have a statistics board with all targets and sales recorded. It’s a good way to quickly view if the business is on track. Don’t rely on an accountant to give the figures at the end of the year when it might be too late.
If payment terms are offered have these costs been factored in? A good rule of thumb is how much would it cost to borrow that money from a bank for that same time period. What extra does it cost the business if clients don’t pay on time? The more cash the grander the purchase power. The greater the turnover of stock, the greater the profits.
People must go into business with a winner’s mindset. To succeed in business, know your targets, keep accurate records of cash flow, act promptly on areas that need fixing and don’t be afraid to ask the accountant for help if need be.
Learn to love the numbers!