Far too often, I see small business owners and their teams display a lack of urgency. Their order books might be healthy, but their approach to getting things done is business as usual. There’s no spring in their step, no escalated communications, no one pushing for more. And that’s a shame, because profitability is really a race – a race against overheads, that is.
How often have you said: “that’s OK, it will ship tomorrow” or “we’ll just invoice the client next week” or “we haven’t lost the sale, we just need to hold the inventory until this time next month.” If this kind of innocent but highly misguided attitude exists in your shop, you’re losing the race against overheads and missing out on profit as a result.
I call it a ‘race’ because that’s how I see it. I know that every month I will have reoccurring, fixed expenses. These fixed expenses can include rent, insurance premiums, utilities, payroll (in most cases) and so on. We call them fixed because even if you have no customers this month, you will need to book these expenses and pay these bills.
Variable expenses are the costs that are only incurred if you deliver your product and service to the customer. For example, if you have a bird house factory – and why wouldn’t you? Birdhouses are awesome! – the wood, glue, nails and paint are variable expenses. Those costs go up and down in conjunction with the sales for your product.
So the key to making money this month is applying as many sales of your product or service against the fixed expenses that you will incur. The more you sell your product, the more profit margin gets applied to your expenses (profit margin being the selling price your charge your customer, minus the variable expenses). As soon as your sales have contributed enough profit margin to the fixed expenses, the sooner you will show a net profit (net profit being your sales minus your variable expenses, minus your fixed expenses). This is your monthly break-even point and getting here should be considered a race! Why?
The reason is because, the earlier in the month you hit your monthly break-even, the more profitable your month will be. This means that there’s a very good reason to invoice this week instead of next. You and your team need to push and push and push to make this happen. The sooner you get this job invoiced, the sooner you can focus on the next customer. Then repeat.
Let’s look at this from another angle: Let’s say you’d like your business to generate 10 per cent in net profit this month. Assuming you are operating an average of 20 business days during the month, you will spend the first 18 days using all the money from sales just to pay your bills (because 90 per cent of 20 days is 18 days). That’s if you’re lucky. Then, you have the last two days of the month to make money. Seems like a pretty narrow window of opportunity, doesn’t it?
As an owner, net profit is what makes it worth your while to take all the risk and sacrifice necessary to start and operate a small business. Otherwise, you’re just making a salary and have arguably just bought yourself a job. So to make the most out of your profit opportunities, consider each month a race.
By the end of the first day, you’re either in the lead or falling behind. If you’re lagging behind, you need to achieve above-average results the following day, just to catch up. Instead of worrying about catching up, get a head start and stay focused from the very start.
Don’t leave it until the end of the month or middle of the following month or – heaven forbid – when your accountant submits last year’s financial statements, to understand where your business is, in its profitability cycle. Make it a game: a race where you and your whole team know how to keep score. You don’t need to be an accountant to figure out your monthly fixed expenses and compare them to daily sales requirements.
Communicate those requirements and explain to your team why getting to those targets, and getting their fast, is important. A tidy profit is necessary if you want to increase wages over time, expand your business and contribute financially and otherwise to social causes in your community. Don’t be apologetic about profit, be opportunistic!
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.