Profit Goals - Not Making As Much Profit As You'd Like?
Posted by James Cooper
Are You Making Sure Your Business Is A Profit Machine By Using These 3 Simple Tools?
A Profit what? .... A Profit Machine! Your business should produce profit.... how much Profit? .... Whatever ‘Monthly Profit Goal' you decide you want! That means you also need to know your ‘Monthly Break-Even Point' at each different ‘Monthly Profit Goal' Level. You see as you increase your ‘Monthly Profit Goal', your business will need to be slightly different (more staff, more marketing, bigger building, etc ) to achieve that new desired ‘Monthly Profit Goal'... this means you also need to determine the ‘Profit Model' at each Level or stage of your business!
Ultimately what we are talking about here are 3 tools you need to be using to determine what "direction" you will be taking your business in. Why? So you can create a Profit Machine of course... that spits out profit predictably and sizably. If that interests you, then discover how to do these simple calculations and questions in your business today so you can proactively shape the direction of your business to print money!
Get REAL!
How about a Reality Check. Now, most people in business have some understanding about the numbers, but in my experience that understanding is based on the original figures they went into business with or assumptions which just aren't true. To determine the direction and what the impacts of you future growth will be, you need to do a few simple calculations and ask a few questions. And if you think that yes I already know this, I've done these before, ....well.... are you monitoring them, because in all likely hood they have changed since you last did them, and it could be that it is in fact impossible to get the growth in profit you want using the current ‘model' or structure. Stop thinking a 10% increase in sales or revenue will automatically yield you more profit. Did you ever stop to consider some of the following points in your calculations ...
Current Monthly Break-Even Point
Gross Profit (GP) = Revenue - Cost Of Goods Sold (COGS) | Eg1; $150,000 - $100,000 = $50,000
Gross Profit Margin % (GPM%) = GP / Revenue | Eg1; $50,000 / $150,000 = 33.33%
Net Profit (NP) = GP - Expenses | Eg1; $50,000 - $40,000 = $10,000
Net Profit Margin % (NPM%) = NP / Revenue | Eg1; $30,000 / $200,000 = 6.67%
Break Even Revenue = Expenses / GPM% | Eg1; $40,000 / 33.33% = $120,012
Ave Sale Value (ASV) = Revenue / # of Invoices | Eg1; $150,000 / 400 = $375
Break Even Invoices = Break Even Revenue / Ave Sale Value | Eg1; $120,012 / $375 = 320
Monthly (Net) Profit Goal
In.... 3mths = $15,000 pmth ...6mths = $20,000pmth ... 12mths = $30,000pmth ... 24mths = $30,000pmth (with a General Manager).
Profit Model
Work Backwards! Start at profit and work upwards through the key figures in the Profit & Loss Statement to determine the new Expenses with any extra resources needed (plant, equipment, vehicles, marketing level, buildings and staff).... then conclude if your GPM% will change or stay the same to get to your new revenue figure. If it's the same...
AT 3 MTHS: Is this Possible... $15,000(NP) + $40,000(Exp) = $55,000(GP) / 33.33%(GPM%) = $165,017 / $375(ASV) = 440 Invoices
Target Monthly Revenue = $165,017
So the real question is... Can we do 440 Invoices with our current resources (The Current ‘Model') or are we totally at capacity? To answer this we must determine our current Utilisation Rate (UR). UR does change and differ for every business, so you'll need to consider and look for different things, but here are some basic examples.
Utilisation Rate (UR)
Eg A - Retail Business Selling Widgets:
Can we handle this increase of 40invoices per month?
UR = Average Enquiries & Orders per day per customer services person to process
Current Enquires per day = 40
Current Orders per day = 400(Mthly Invoices) / 20 (working days per mth) = 20
Conversion Rate = 50%
Ave Time Per Enquiry = 3 mins
Total Enquiry Time = 40 x 3 = 120mins
Ave Time Per Order = 6 mins
Total Order Time = 20 x 6 = 120mins
COGS = 8 hours per day
Revenue Activities = 120mins + 120 mins = 4 hours
UR = 4 / 8 = 50%
So by looking at this we could say that if this ‘customer services person' only had to deal with enquires and process orders then we could do up to double the number of invoices that we are at the moment. 400 Invoices at 50% UR, at 90% UR we could do 721 Invoices.
However, in most Small Businesses it is likely that the Customer Services Person will have other roles and responsibilities, i.e. they could be an admin person and additional to answering the phone enquiries and processing orders they may have the other 4 hours of the day totally packed with bookkeeping tasks, Accounts Payable, Accounts Receivable, Posting, etc... So ...
At the 3 Month Profit Goal we only need an extra 40 Invoices done which is;
Orders: 40 x 6 mins = 240mins / 20 days per mth = 12mins per day
Enquires: 40 orders / 50% conv rate = 80 Enquires x 3mins = 240mins / 20 days per mth = 12mins per day
Total extra time per day 12 + 12 = 24mins
So, can this person handle that? Or do we need to outsource some of the bookkeeping tasks to free her time up which will increase her ability to do more Customer Service work but also increase Mthly Expenses with a new bill for an Outsourced Bookkeeper? An increase in monthly expenses means we need to recalculate the Break-Even Point and then we'll need a new Target Monthly Revenue!!! Which means more Invoices, which means more time to complete those invoices and enquires, which means more pressure on resources!!! THINK ABOUT IT!
Eg B - Service Business:
Can our Operations Team handle this?
UR = Average Billable Hours per day per service person
COGS = 8 hours per day
Revenue = 5 hours per day (Doing Billable Work)
UR = 5 / 8 = 62.5%
If 62.5% = 400 invoices, then 100% = 400 / 62.5% = 640 invoices pmth, at 90% UR ( = 6.8hrs ... rounded to = 7 hours per day) = 640 x 90% = 576 invoices is probably a realistic capacity level at current ‘model' (staffing levels).
8 hrs x 5 technicians = 40 hrs x 20 days = 800 Total Potential Monthly Billable Hours
5 hrs x 5 technicians = 25 hrs x 20 days = 500 Total Monthly Billable Hours
7 hrs x 5 technicians = 35 hrs x 20 days = 700 Total Realistic Capacity Monthly Billable Hours
500 hours / 400 invoices = 1.25 hours per invoice
1.25 x 40 (extra invoices for Monthly Profit Goal 1) = 50 hours / 5 technicians = 10 hours / 20 days = 30mins each day.
Increasing technicians from 5 hrs Billable per day to 5.5 hrs Billable per day. So, it would seem that we wouldn't need to increase the operations staff or resources like new vehicles / building to handle the extra 40 invoices.
Can our Sales Team handle this?
Let's say we have a Business Owner who is the Sales Person as well as running the place, to get the current 400 invoices all sold in the first place, Mrs Business Owner spends 10 hrs per week as the sales person (in total they work 60 hrs per week so have no capacity or desire to increase the number of hours of total work). However, only 10% of work requires a sales presentation, the other 90% are handled by the admin team just taking a phone order.
40 more invoices is 10% more business from the current 440 invoices. So logic would state Mrs Business Owner at 40 invoices extra x 10% = 4 more invoices requiring a sales presentation, but she only converts 50% of the sales presentations so would need to do an extra 8 sales presentations over the month (4 / 50%). Well, at 10hrs per week x 4.33 wks per mth = 43.3 hrs (2598mins) pmth on sales presentations she must take ...
400 invoices x 10% = 40 sales presentation 'won' invoices pmth
40 / 50% = 80 sales presentations pmth
2600 / 80 = 32.5mins per presentation
8 extra presentations x 32.5 mins each = 260 mins pmth / 4.33 = 60 mins pwk extra.
Most business owners could handle an extra 1hr pwk (4hrs pmth) for an extra $5000 NP pmth, but only you can determine if this is sustainable and in all likely hood you will reach a snap point, when 60hours was ok, 61 hrs ok, 62hrs we flip out or melt down so we need to change the model.... what about employing a f/time sales person for $5000 per month, and you by back 10hrs per week and they are only running at 25% utilisation rate, but they are paying for themselves from day one?!?!
Can our Admin Team handle this?
!!!!!! remember they have an extra 10% more invoices to create (40) and also the extra load of more phone orders. Etc, etc....
Will our Marketing Expenses go up which will adjust our Break-Even Point?
Confused Yet?
Hey look, my point here is really to challenge your thinking, you simply need to ask more questions about the direction you are taking your business. You can see above how with the more information we gather we dig to a new layer of information, and again and again. Scratch Below The Surface To Find The Truth!
This Weeks Action Points...
Get out a piece of paper and / or use a spreadsheet, but start thrashing some figures around that go beyond the surface Revenue and Profit. Thrash about the figures that ask..."Is this possible with or current resources?" ... "What is the maximum revenue and profit using our current resource?" ... "What is our current utilisation rate?" ... "What extra resources will we need at that level?". Answer these questions and others on this tangent and you can get a true picture of where you need to be to create a Profit Machine to your desired level. Note: It's almost always bigger that you first thought.
