Why You're not as Profitable as You Want
Jan 5, 2015

Being profitable is not that complicated. It is also not necessarily easy but I believe most see understanding the numbers as being a complex monster so they stay away. Here it is in a nutshell:

1. Know your margins

2. Budget for profit.

3. Manage your fixed costs

 

1. Know your margins

It all starts with margins. If you don't know how much money you make when you make a sale, it is very hard to know how to make money in your business. Where this gets complicated is when you need to factor in varying types of labour (some directly attributable, some not), costs that are shared with other income streams (e.g. depreciation of equipment). To keep it simple, I believe you should only account for costs in your margin that can be easily tracked as  direct cost to that income stream (i.e. direct labour and materials) and put all other less direct costs into your fixed costs. From here you need to understand your business model - i.e. how much sales to you need to make at what Gross Margin to make the profit you want.

Here's an example:

A dive company needs to allow for its equipment when they quote on a job. They could try to say "we use the equipment for about 4000 hrs before it needs replacing and it costs us $8000, therefore it costs us $20/hr so we'll charge it out at $50 to allow for 40% margin". That formula works but can be difficult to always know how long equipment lasts and can be a lot to keep track of. The other problem is, this works well if you are running at maximum utilization but if you're not, you may not allow enough to cover fixed costs.

It is better to look at it from a macro level. For example:

I'd rather see them say "our fixed costs (including depreciation) are around $1.2MM per year and we want to make $300,000 profit. Therefore we need to cover costs of $1.5MM. We will aim for a 40% Gross Profit Margin (based on experience and market) therefore need $3.75MM in revenue to achieve our profit goals ($1.5MM / 40%). If we are running 3 crews they each need to generate $1.25MM of revenue or assuming a utilization rate of 90% and 2000 hrs/year, they need to generate $694/hr ($1.25MM / 2000 / 90%). Now we can track utilization rate and sales per team to see if we are on track. All marketing and efficiency can be geared around those numbers.

This approach enables us to more easily track job costing (because you only need to track the direct costs that are easily accounted for) which makes margin easier to track.

The main danger with using this method is if you get big swings in fixed costs (i.e. depreciation) then you need to be aware of that and adjust accordingly. If this is the case then I'd suggest that needs to be examined more closely.

 

2. Budget for profit.

In his great (and sometimes interesting) book "Profits aren't everything, They're the only thing" - author George Cloutier wisely advises when setting budgets, start with a conservative sales estimate followed by allowing for your profit. Then extrapolate your Gross Profit (using your targeted Gross Margin %). Then what ever number is left when you subtract your profit from your Gross Profit, that is what is allowed for fixed costs.

This approach make you sweat. But when you do it, it forces you to take a hard look at your numbers and see what decisions your making. At the end of the day, your financial statements are just a reflection of choices that have been made within your company. This process makes give you a new perspective on how to make those choices.

3. Manage your fixed costs.

It always fascinates me how few people understand their fixed costs. I.e. how much does it cost just to open the doors everyday before you've even made a sale. Fixed costs can creep massively when times are good and is usually something people are on when times are bad. The trouble can be if you're not watching them closely and the creep happens, you are leaving money on the table.

Once you've set your budgets in the step above, hold people accountable for maintaining them. This is an area where profit sharing and open book management can be extremely powerful (see Jack Stack book - The Great Game of Business)

 

Good luck and let the profits roll.

 

Why You’re not as Profitable as You Want
Jan 5, 2015

Being profitable is not that complicated. It is also not necessarily easy but I believe most see understanding the numbers as being a complex monster so they stay away. Here it is in a nutshell:

1. Know your margins

2. Budget for profit.

3. Manage your fixed costs

 

1. Know your margins

It all starts with margins. If you don't know how much money you make when you make a sale, it is very hard to know how to make money in your business. Where this gets complicated is when you need to factor in varying types of labour (some directly attributable, some not), costs that are shared with other income streams (e.g. depreciation of equipment). To keep it simple, I believe you should only account for costs in your margin that can be easily tracked as  direct cost to that income stream (i.e. direct labour and materials) and put all other less direct costs into your fixed costs. From here you need to understand your business model - i.e. how much sales to you need to make at what Gross Margin to make the profit you want.

Here's an example:

A dive company needs to allow for its equipment when they quote on a job. They could try to say "we use the equipment for about 4000 hrs before it needs replacing and it costs us $8000, therefore it costs us $20/hr so we'll charge it out at $50 to allow for 40% margin". That formula works but can be difficult to always know how long equipment lasts and can be a lot to keep track of. The other problem is, this works well if you are running at maximum utilization but if you're not, you may not allow enough to cover fixed costs.

It is better to look at it from a macro level. For example:

I'd rather see them say "our fixed costs (including depreciation) are around $1.2MM per year and we want to make $300,000 profit. Therefore we need to cover costs of $1.5MM. We will aim for a 40% Gross Profit Margin (based on experience and market) therefore need $3.75MM in revenue to achieve our profit goals ($1.5MM / 40%). If we are running 3 crews they each need to generate $1.25MM of revenue or assuming a utilization rate of 90% and 2000 hrs/year, they need to generate $694/hr ($1.25MM / 2000 / 90%). Now we can track utilization rate and sales per team to see if we are on track. All marketing and efficiency can be geared around those numbers.

This approach enables us to more easily track job costing (because you only need to track the direct costs that are easily accounted for) which makes margin easier to track.

The main danger with using this method is if you get big swings in fixed costs (i.e. depreciation) then you need to be aware of that and adjust accordingly. If this is the case then I'd suggest that needs to be examined more closely.

 

2. Budget for profit.

In his great (and sometimes interesting) book "Profits aren't everything, They're the only thing" - author George Cloutier wisely advises when setting budgets, start with a conservative sales estimate followed by allowing for your profit. Then extrapolate your Gross Profit (using your targeted Gross Margin %). Then what ever number is left when you subtract your profit from your Gross Profit, that is what is allowed for fixed costs.

This approach make you sweat. But when you do it, it forces you to take a hard look at your numbers and see what decisions your making. At the end of the day, your financial statements are just a reflection of choices that have been made within your company. This process makes give you a new perspective on how to make those choices.

3. Manage your fixed costs.

It always fascinates me how few people understand their fixed costs. I.e. how much does it cost just to open the doors everyday before you've even made a sale. Fixed costs can creep massively when times are good and is usually something people are on when times are bad. The trouble can be if you're not watching them closely and the creep happens, you are leaving money on the table.

Once you've set your budgets in the step above, hold people accountable for maintaining them. This is an area where profit sharing and open book management can be extremely powerful (see Jack Stack book - The Great Game of Business)

 

Good luck and let the profits roll.

 

Do Your People “Want To” or Feel They “Have To”?
Oct 20, 2014

There are not many businesses out there where the results are not massively affected by the people who work there. In fact there are none.
Knowing this is true, how much effort and emphasis should be place on your philosophy and practices concerning your people? Tons.

I commonly hear Business Owners complaining about how hard it is to find good people and the stress and inconvenience caused by employees etc.
Yes people are complex, that is what makes us human—but the truth is—you don’t have a business without them.

People are your staff and they are your customers. They are your suppliers and your financiers. And how they feel about you and your business is going to greatly influence how easily and well you grow your business.

As recently as February of this year, only a scant 30% of workers in the US were considered to be “engaged” in their jobs. That means that almost 3/4 of an entire workforce are DIS-engaged and are working well below what makes them happy and fulfilled. Now those words ‘happy and fulfilled’ make some business owners cringe …

“I mean shouldn’t they just be happy they have a job? They should be thanking me!”

That attitude is fine if you are happy with below average people. And when I say below average people, what I mean is people who are not inspired or engaged.

89% of employers think that employees leave them for more money—when the shocking truth is that only 12% actually do. So why did the other 88% up and leave? The answer may be more basic than you think:

The fact is every human being wants to be and feel loved and cared about. We are selfish creatures who are primarily concerned with how we feel. For some this is a lesson we’d rather not hear. It’s too soft and emotional.

In contrast, today’s business environment is sprouting a new breed of business that is employee-centric. These businesses (think Zappo’s, Google, Netflix to name some) know that when their team feels cared for, engaged and challenged, they pass that on to the customer who in turn feels great about the business.
More importantly, engaged employees are so, not only because they are cared for, but because they truly understand the trajectory of the organization—and exactly what their role is in its success.

Have you ever been served a coffee by someone frowning? It might physically be the best coffee in the world but you don’t necessarily get that feeling from it. You may not even consciously notice – it’s just that the experience is ‘just ok’. Compare that to being served a coffee by someone with a genuine smile who when they look you in the eye communicate, “I really hope you enjoy this. I made if for you” and there is a hand drawn smiley face on the lid. There is a tangible difference.

And the same goes for all people who interact and connect with your business. Do your team ‘want to’ be there or feel they ‘have to’ be there. How people feel after they interact with your business is a telling sign for the sustainability and potential for greatness of your business.
Take it seriously. It should be one of your top priorities—not only for your people—but for the throngs of customers who will jump ship to a competitor that truly “gets it”.

Just look below, and ask yourself. Do I “get it?”

10 Shocking Stats About Employee EngagementInfographic crafted with love by Officevibe, the corporate team building and employee engagement platform.

The Importance of Planning + key thought provoking questions
Oct 8, 2014

If you have not already done so, now is the time to get clear for the quarter ahead.

A task that seems to be easy to let slide ... but you know the difference when you take the time to plan.

Key Question: Based on my past performance, how thorough does my planning need to be in order to achieve my goals? Side note: This does not need to be boring. On the contrary ... I had a couple of beers overlooking the beach while doing it. It helped to boost creativity. If you need some guidance or structure for you planning, use our 90-day planning system (email our office for a copy)

The questions you ask yourself during this time are key.

Here are a few I asked myself during my session. Some are short term (next 90-days and some are bigger picture)

  • What would I have to do (WWIHTD), to get 6 new speaking engagement in the next quarter?
  • WWIHTD to increase the number of referrals I receive by 50%. What value would I have to deliver?
  • How would I further develop my niche and what might the benefits be?
  • If I wanted to achieve my 5yr goals in 1yr, what would I need to learn or change about myself?
  • What has been my true motivator for action in the past? Has it changed? How can I leverage that more to be more proactive?
  • From what I've learned about Family Business Australia (A new organisation I've recently joined) what role should it play in my business over the next 3yrs?
  • Where do I want to see Melina (my right hand person) within the business in 3yrs time?
  • Who do I need to be more of to achieve my goals?
  • What do I want from my new marketing system (the implementation of this is a 90-day goal)
  • What are the keys for me to maintain momentum without getting sidetracked?

Now what are your questions? Developing your questions might just be the most important part of planning. Without the question, the thinking and planning never comes. And of course, then neither does the results.