Often times when business owners set financial goals, they focus on their turnover rather than profit. People often talk about their turnover, but as I always say, turnover is vanity, profit is reality.
You see a big turnover means very little if you have nothing to show for it at the end of the day. More often than not increasing the turnover means working harder for less. Higher turnover leads to increased costs, the need for more infrastructure, hiring more people and many more challenges. Usually we are simply just amplifying our stress levels because of business inefficiencies, like a leaking bucket, the more water we pour in the more comes gushing out.
Realistically, there isn’t a single business operating at 100% efficiency. So that’s where we need to start, it’s the low hanging fruit.
How much money are we actually making from trading our product or service, in other words, what is our Gross Profit before we pay for our fixed expenses? This is an important number because it shows how viable the business is. The easiest way we can increase our gross Profit is by increasing our prices or reducing the cost from our suppliers which are often materials and subcontractors. Ideally aiming to do both will maximise our profitability.
However this isn’t always easy, there usually is only so much you can charge before you price yourself out of the market, unless you have built yourself well into a niche. It is important to think about who you want to service rather than just sell to every potential customer. Why? Let’s say you have ABCD customers, A stands for ‘Awesome’, B stands for ‘Basic’, C stands for ‘Can’t deal with’ and D stands for ‘Dead’. Using the 80/20 rule typically your A’s and B’s are 20% of your customers who look after 80% of your profit and your C’s and D’s just give you 80% of your headaches! Therefore being a bit more selective so you attract more of the A’s and B’s and less of the C’s and D’s, you get to do less work for a better reward.
It is absolutely vital that we track and understand our core numbers, the Key Performance Indicators, for instance Sales, Conversion rate from lead to customer, Gross Profit, Net Profit etc. I always say to clients, if you were to go on a 3 month cruise and you had a General Manager in the business who could only send you one sheet of paper, and by looking at the KPI’s on that sheet of paper you would know exactly how the business is doing, then you have a solid dashboard that tells you how the engine room is going and if there are any warning signs that need to be addressed before, not after, things blow up. That is the dashboard we develop for the business, with all the gauges we need. After all you probably wouldn’t want to drive a car with no dashboard, no working gauges right? It would be nerve wracking and uncomfortable; am I speeding, do I have enough fuel to get home? So why would you drive your business and your livelihood without a dashboard then?
With a couple of small, smart, yet profound changes, you will be able to drive your business far more predictably and profitably.