The 7 Habits of Highly Chilled Small Business owners
This is the third article in a monthly series on small business owners I have met or worked with over the years who developed beautiful successful businesses.
Stories of successful real business owners
In 35 years of doing business and working with some of the most inspiring people I’ve ever met, I’ve learned a very important lesson: Success in small business starts by building great habits. I call these practices the “7 Highly Chilled Habits” and I find they’re best illustrated with the stories of real business owners who I happen to have had the pleasure of coaching.
The articles are based on my E-book, The 7 Habits of Highly Chilled Small Business Owners. All of my books and other resources are available for free here
Highly Chilled Habit #3:
Be On Top of the Numbers
In order to build a Highly Chilled business, you must keep your fingers on the pulse of all your business’ key health indicators, every week
The most focused business owner I’ve ever met is Narinder. I could tell a story about Narinder to illustrate almost all of the 7 Habits of Highly Chilled business owners, but this one about numbers is probably the most important.
More than 15 years ago, Narinder started his first small supermarket business in Sydney. This is his website. Over time, the business has grown enormously, and his stores are starting to pop up across the inner city.
Each of Narinder’s stores is profitable, his staff love working there and when he opens a new store, customers bring flowers to welcome him to the neighbourhood. As I said, there are many things Narinder does well, but the habit he’s developed to an art form is that of being on top of the numbers religiously, every day and every week.
Investigate the Numbers
Narinder was awakened to the power of numbers early on. He and I concluded that his first store was not performing to its full potential and we wondered what was wrong, so we decided to investigate. We started by measuring which products and categories sold well and which didn’t. We also analysed which sections of the store realised most of the sales he made. Narinder divided the store into 12 different sections and (with the help of his staff and some simple checklists) set about getting deeper insight into the shopping behaviours of his customers. A month later we had the stats.
It was immediately obvious that 2 sections of the store were visited much less than any of the others. The numbers made it very clear that people simply didn’t walk through those areas. We decided that the store needed to be re-organised and reconfigured. The 2 struggling sections needed lower shelving, more lighting and a different mix of product categories. Narinder pulled out all stops and within a week, the store had a completely different look and feel. After just a month, we were looking at a 9% increase in turnover. 6 months later, sales had grown by 25% with an improved gross margin.
Become a Devotee at the Church of Business Numbers
These days, Narinder measures everything on a daily, weekly and monthly basis. He has developed the habit of having his teeth in the numbers – and he’s never letting go.
Remember, if you want to become a Highly Chilled business owner, you must learn to love the numbers and regularly measure the ones that matter most to your business.
Your Homework (The Chilled Kind)
Here’s a short exercise you could carry out to start the process of making this habit your own.
Ask yourself: What would be the 15 (or so) key indicators of the health of your business?
Next, ask yourself: How could you have each of those indicators expressed as a number on a scale?
Practice Highly Chilled habit #3: Instruct someone else in your business to get you those 15 numbers every week and every month for you a in a single report.
The reality is that most small business owners operate in a constant state of overwhelm and stress. We feel that, at some level, our skills don’t cut the mustard, and we often have no idea where to focus our (very) limited time when faced with seemingly endless priorities.
Sound familiar? This is why “Fun in Business” matters. If your business is fun, you won’t be overwhelmed. If your business is fun, everything is working: you’ve got time to do the things you enjoy, your staff are happy, you’re making money. Need I say more to entice?
Fun may seem like a very strange and whimsical concept to focus on when we’re talking about growing a business. After all, isn’t fun reserved for time spent socialising at the pub or lazing about on tropical islands? Events that happen outside of business hours. Experiences that are paid for by your business, but otherwise entirely unrelated.
Perhaps not. In fact, I believe that Fun in Business is actually a hard-nosed business management principle. It is that deep sense of reward and satisfaction you get to feel as a result of building a business that hums along like a well-oiled machine.
Anyone else tired of focusing on all the serious stuff? The things that get drummed into us by patronising business management books and gurus? IT systems, contracts, staff management, sales and cashflow are all very important things, of course, but – in my humble opinion – they’re not where we must start.
We must start with fun. Why? Because if your business is fun, it means you
are making money
have enough time to do what you need to do
are proud of the stuff your business makes or delivers
know exactly where you’re going and why
have happy customers
have engaged staff
have balance in your life.
In the beginning, when we are first getting started in our business, there is usually a high level of that kind of fun around. Everything is new, exciting, adventurous and challenging. However, after a while, the real world comes rudely a-knocking and we suddenly find that
we aren’t making as much money as we thought we were going to
we haven’t been able to take our daughter to soccer training
our clients haven’t all become our greatest fans
our staff aren’t the perfectly aligned human beings that we expect them to be.
When this realisation sets in, we start to feel like we have become a slave to the business. We get worried that the light at the end of the tunnel may not be sunshine.
We try telling ourselves that “Rome wasn’t built in a day” and we “have to take the rough with the smooth” because, like Churchill said, “Never, ever give up!”. We push harder and longer, holding onto the hope that good times will surely follow.
This is Business Hell, and it’s where most of us spend our time: Chasing our tails. Managing crises. Operating as a “Jack of all trades, master of none”. Living in a constant state of overwhelm.
After 30+ years in business (and working with lots and lots of business owners), I have come to believe that the only way out of this overwhelm is to ensure that business itself is fun. Deep and meaningful fun.
One of the greatest challenges for businesses, especially small ones, is that there are so many priorities competing for your attention on a daily basis. It feels almost impossible to decide where to focus next.
Many business owners also lack confidence in their aptitude for certain business development tasks. After all, you started this endeavour on the back of your skills as a carpenter, accountant or architect; not your background in sales, marketing, staff management, etc. Nobody taught you how to write an operations manual or create a cashflow forecasting spreadsheet, did they?
The result? Most of us revert back to “picking up the hammer” (because that is the one skill we know like the back of our hand), managing crises and being reactive to whatever is thrown at us. Like I said, Business Hell.
A New Tool for Your Toolkit
The concept of Fun in Business is an incredibly powerful tool, designed to keep you out of reactive crisis management mode so that you can focus on what is most important for today, tomorrow, next week, next month, next year and beyond.
Here’s how to use it in practice.
Think of a scale from 0 to 10. Let’s call it the Fun in Business scale.
10 on the scale? This past week in business has been so much fun that you can’t wait to get up and go to work. You’ve gone home every day with a big smile on your face. You’ve achieved great things. You had a wonderful time with your co-workers. Everything at work (or in business) has been just brilliant.
0 on the scale? Entirely the opposite. Your week at work has been simply awful on every single level. Pass the vino now.
Now ask yourself the following questions:
What number on the Fun in Business scale would you give your last week at work (or in business)? Let’s say 4.6.
Thinking ahead, what number on the scale would you like next week to be? Perhaps a 5.
What one, two or three actions can you (or we, as a team) take to progress from 6 to 5 on the Fun in Business scale, next week?
These questions, asked consistently, will cut through all of the crises and competing priorities, leaving you relentlessly focused on the next most important thing that must be done in your business.
These questions, answered individually or within a team (anonymously and with the results averaged), will set you up for having hugely productive conversations about how to make tomorrow just a little more fun than yesterday.
I promise, when you commit to building a Fun Business by regularly asking yourself these pivotal questions, you will have taken the first step to building a business that sustains you for years to come.
Remember, a business that isn’t fun won’t be around for long!
Your Homework (The Fun Kind)
Now, I’ve got a hunch that you’re a hands-on kinda person, so here are some actions for you to take that will help make your business more fun. Answer the following questions and start thinking about how you can make intentional changes. The results will be more illuminating than you might think!
Make a list of the 20 most fun experiences or most exciting times you’ve had in your business.
Write down the 3 things you like most about your business.
Write down the 3 things you like least about your business.
This a guest post by Emma worden, see Emma’s details at the end of the article
The basics of taking control of the money in your business
It seems like more and more Aussies decide to give entrepreneurship a go. In fact, according to the most recent studies, there are 2.1 million small businesses in the country and this number is expected to grow even more. However, running a small business isn’t as easy as it may seem, especially when it comes to managing finances. So, if you’ve ditched your 9-to-5 job and started your own small business, you could use any help you can get. And that’s why we came up with 10 tips for better finance managing in your company.
Don’t mix personal and business finances
One of the biggest mistakes rookie entrepreneurs make is failing to separate their personal and business finances. This leaves them not knowing how well their business is doing and whether some changes in their operations should be made. So, if you want to be able to manage your company’s finances effectively, keeping a separate business bank account is an absolute must.
Manage your accounting
There’s no need to say that accounting is one of the most important aspects of being an entrepreneur. If this is your first time running a small business, chances are you don’t know much about accounting. In a scenario like this, hiring a good bookkeeper can be a real lifesaver. If you decide to tackle accounting yourself, investing in an accounting software can turn out to be an amazing idea.
Be aware of your day-to-day costs
No matter what kind of small business you’re running, you can’t survive in the market if you don’t have enough money to cover all of your day-to-day costs. We’re talking about costs such as your rent, wages and office supplies. Therefore, you need to be aware of how much money your business needs in order to keep operating and make sure you don’t go below this.
Know how to deal with taxes
If you want to be able to manage your company’s finances effectively, you also need to know how to deal with taxes. If you’re a small business with a turnover of less than $10 million, the company tax rate you’ll have to cover in currently 27.5%. Make sure you meet all the deadlines for filing tax returns in order to avoid fines and interest.
Apply for a loan on time
There’s no reason for you to wait too long before you apply for a loan that’ll help you grow your business. In fact, if you wait until your company is in a bad financial position to apply for a loan, chances are you won’t be able to receive financing at all. Therefore, make sure you turn to a company that gives fast business loans while your finances are still good.
Create an emergency account
You never know when things can go wrong, and having some money stashed away can be a real lifesaver. The best way to do this is to create an emergency account and move a portion of your monthly earnings to that account. The money you set aside can help you cover payroll during a slow season or allow you to replace equipment that broke down.
Collect your invoices
If you want your business to survive, you have to make sure you maintain a healthy cash flow. And this is something you won’t be able to do if your clients are late on their payments. The best way to deal with such clients is to hire experts in invoice collection. There are plenty of invoice collectors in Australia and finding a company you can turn to shouldn’t be too difficult.
Protect your data
Another important thing to have in mind if you want to avoid financial hiccups is that you need to protect all of your company’s data. This is the case because new mandatory data breach reporting laws came into effect in Australia. According to these laws, you could face a large fine in case an unauthorized entity comes accesses anyone’s personal information from your business computer system.
Don’t spend prematurely
One of the biggest mistakes you simply have to avoid is spending prematurely. This means that you shouldn’t go big on marketing, business cards and inventory until you’re 100% sure your business has what it takes to succeed. Spending too much on things like this can create a cash flow blockage, which is definitely something you need to avoid.
When running your own business, it’s quite easy to get sucked up in the benefits of business ownership. However, if your business is still in its early days, you probably can’t afford this just yet. Instead, what you need to do is set your salary as low as possible in order to save money you can spend on improving your company’s operations.
Have these 10 tips in mind and you might just manage to follow the steps of many Aussies out there and start a successful small business. Just bear in mind that even once you establish yourself on the market, looking for new ways to improve your money management is critical.
Emma Worden is a business manager from Sydney. She enjoys reading and writing on a business topic and giving advice and tips through her texts. If you want to read more of her work, you can find it at https://bizzmarkblog.com/
Bang crash! Watch out! Duck! Hang on! Oh no! Here we go again!
My life as a business owner feels like a roller coaster ride, I’m hanging on for dear life half the time… How can I slow it all down a bit and take control of my business and my life?
Running your own business can feel like a constant juggling act and most of the time, all you do is hold on for the ride and try to make sure you duck at the right time.
But it doesn’t have to be like that. Running your own business is never something you should because you want to have an easy life, because it’s never going to be easy. But you can make sure the business works for you rather than the other way round.
The Big Question of Small Business
It all starts with this question, The Big Question of Small Business:
Why does your business exist and why would anybody care?
Most business owners can’t answer that question clearly, in a single power sentence. And if you can’t answer that question, there is one really important thing you can never do, with confidence and clarity, and that is to say NO.
Saying NO is probably the one, most important thing that you have to learn to be able to do well in your business in order to to get off the roller coaster and to take control.
I’ll give you an example from my own experience that happened to me only last week.
That question, the Big Question I talk about above: Why does your business exist? My answer to it is this:
I help small business owners feel great about themselves and about their business, by helping them discover and build their own unique Beautiful Business and Life
That’s what I get up to do, each and every morning.
So last week I received an email from the health and wellbeing officer of one of the Big Four Banks here in Sydney. This person is running a personal wellness program for the entire staff of the bank in Sydney and she was looking for a coach to be involved with the program. The opportunity was enormous. This bank employs thousands, if not tens of thousands of people in Sydney alone and being offered a sponsored opportunity to get in front of all those employees is incredible… For the right person.
I wasn’t the right person for the job
And there’s the rub. I’m not the right person for the an opportunity. I work with small business owners, not with employees in the corporate world. Now I’m sure I could have done something for this wellbeing officer and made it work and I would have done a good job, I have no doubt about that, but I actually know someone who is much better equiped to take on this project. She specialises in working with employees in the corporate world to help them feel better about themselves and advance in their careers. So I thanked the Wellbeing officer and I introduced her to my friend and two days later, my friend had signed up the gig. There’s a good chance that this is the best gig my friend has landed in years and I am absolutely sure she’ll lay them in the isles… She’s brilliant at this kind of thing.
I didn’t get the gig, I won’t make any money from the gig, but I also didn’t get the stress from doing something that wasn’t absolutely in my area of expertise. I’ve learnt over the years, that I’m really good at some things and not others, and I need to stick with those. My friend is really excited and will have a lot of fun with the project, probably make a lot of money and do really well. What’s more, she’s super motivated to return the favour and I have no doubt something will come my way at some stage that’s right up my alley.
Learning what to say No to, and do it in such a way that means everybody is happy is absolutely a core skill if want to get off the roller coaster and take control of your business.
So: Why does your business exist, and Why would anybody care about that?
I’d love to hear, drop me a line.
Do you feel overwhelmed or stuck in your business? Are you operating in crisis management mode, running around from urgent problem to emergency all day long, extinguishing brush fires along the way? Do you feel like you will never reach your goals because your day is so chaotic that you don’t have time to think (let alone eat or sleep!)?
If so, you might be stuck, trying to paddle your way out of a violent business whirlpool without even realising it – a situation that is not only stressful but also unsustainable.
In the first few years of business, you accept that all this frenzy and stress is par for the course, but a few years on, when nothing much has changed, you start realising there’s a problem.
You’re still burning the candle at both ends. You’re still fixing everybody else’s problems. Even worse, the long-term strategy stuff you really want to work on keeps getting pushed back and back again, forever.
How to get unstuck, take control and make business fun again:
You’re not alone in this problem. Many small business owners feel frustrated, stuck and overwhelmed in business on a daily basis.
However, the secret to building a beautiful business and life is to find your way around this state of overwhelm and take control of your business.
The first step? Start thinking differently about your business, your priorities and your wellbeing.
Fun is serious stuff (and the opposite of overwhelmed in business):
It may seem strange to make Fun the key focus in your business’ development. We’re generally told that the function and purpose of business is to make money. Hence, we should make “maximising shareholder value” (making a profit and generating cash) our top priority.
However, after many years doing this gig, I’ve come to believe that Fun is the opposite and the antidote to feeling overwhelmed in business and that we need to learn to think differently to the status quo if we want to build businesses that stand the test of time.
Conscious capitalism and the purpose of business:
I like to quote John Mackey, the founder and CEO of Wholefoods markets in the USA. A few years ago, the company was bought by Amazon for $14 billion USD. Wholefoods made a profit and paid dividends to its shareholders every year for its entire existence. In other words, John Mackey has established credentials for making money in business. Yet John Mackey wrote a book called “Conscious Capitalism” (more about the book here and more about the Conscious Capitalism global movement here), and in it, he says this:
“Thinking that the purpose of business is to make money is as silly as thinking that the purpose of human beings is to eat food. We need to eat food, eating food makes us feel good, but we eat food so that we can do what we need to do on this earth. It is the same with business and profit. Business needs to make profit, and plenty of it, but it needs to do so in order to fulfil its purpose, the reason it exists.”
So yes, a business must make money. It must generate profit and cash flow while working hard to maximise its return to shareholders because, as I say elsewhere on this website, “A business that doesn’t make profit is a hobby.”
BUT if your focus is only on making money:
There will never be enough. This year you might aim to make $10,000 profit, but as soon as you’ve made $100,000, you’ll want to make $200,000, then $500,000 and so on. You will eventually get overwhelmed in business, because there’s always more money to be chased.
It will all feel meaningless. Why pick $100K or $500K, why not $531,629,23 or $496,187.42? Any number you choose will be arbitrary.
Your brain won’t cooperate. To your subconscious brain, there is no difference between $100K or $150K. Your subconscious mind cannot think in concrete concepts, such as numbers, it can only be engaged by emotional concepts.
You’ll wonder what it’s all been about when you’re on your deathbed. Nobody has ever lain on their deathbed and thought, “I wish I’d made more money”. I guarantee you that much.
How do you get beyond money? Take these 4 steps:
So, if you want to get unstuck in business, eliminate overwhelm and stop being a crisis manager, you must start thinking beyond making money. You must start having Fun in Business.
Ask yourself the big question of small business: Why does your business exist and why would anybody care about that? (The ‘Purpose’ question – more about the Purpose of Business here)
Develop discipline around your time and don’t waste it on unimportant tasks. Know that your time is the most valuable asset of your business, and as a responsible business owner, it is your job to look after and get the best possible return from your assets. (Read more about business owners and time management here)
Get the right people on the bus, in the right seats, facing the right direction. Get the wrong people off the bus. There is no greater cause of stress, overwhelm and frustration than people problems. (More about managing people here and here)
I have created a detailed self-analysis tool called “The Whirlpool Report”. You can go and complete the full Whirlpool survey now and you’ll be sent your report within the next 24 hrs, entirely for free.
Make yourself a cup of tea and take 10 minutes to complete the survey now. I think it will give you some useful food for thought about feeling overwhelmed and stuck in business.
Further reading about being overwhelmed and stuck in business:
I believe the question about making money is even more important than the growth question because I have seen many businesses go bankrupt even though they were growing. Business growth only makes sense if you end up with more money in your bank account as a result. A business that doesn’t make profit and generate cash flow is a hobby.
So, these are the most important rules about making and keeping money in your business.
No profit, no business. So is profit is the Purpose of business?
John Mackey is the founder of a large international chain of organic supermarkets called Wholefoods Markets. The company has been highly profitable ever since John founded it in the early eighties and it has paid a dividend to its shareholders every year of its existence. Amazon purchased the company for untold billions of dollars and John Mackey is now one of the world’s richest people. John clearly knows a thing or two about building great businesses and about making money.
John Mackey also wrote a book however, called Conscious Capitalism and in it he says something that made the penny drop for me. He says this:
“Thinking that the Purpose of business is to make money is as silly as thinking that the Purpose of people is to eat food. We need to eat food, we eat food all our lives, and good food is better than bad food and without food we die, but eating food is not the reason we exist. We eat food so we can make good on our Purpose in life”.
John says it’s the same with business and money. The business must make money and profit and generate cash flow (and plenty of it!), but only so that it can make good on its greater purpose.
So, let’s be clear about that: making money is the means to an end, and without profit and cash flow, the business cannot perform its function.
Pricing: Someone’s going to be the most expensive, why not you?
Everyone can sell cheap. It takes no special skill or approach to sell cheap. It takes incredible skill and focus to be the cheapest, make a profit and be around for the long haul. Very few businesses can do so consistently. The only three I know of are Aldi, Ikea and Walmart. I’m sure there are others but they’re few and far between.
If you make low pricing your main differentiator and competitive advantage then you better be the most disciplined and focused business out there because there will always be someone knocking on the door undercutting you and you’ll constantly struggle to make enough money to survive, let alone build a beautiful business and life. Competing on price is simply a dog’s game.
Instead, ask yourself what you need to do to be the most expensive. Raise your prices and see what it takes to sell with higher prices. What else can you compete on? Remember, a beautiful business and life is so much easier to achieve with high margins.
20% Of your customers generate 80% of your profit. Who are they?
You might have heard of the Pareto Principle or the 80/20 rule. This rule can be applied in many situations, but there is no more appropriate topic than a business and its customers.
I can just about guarantee that if you were to run a report listing all your customers on a continuum with maximum profit and cash flow at one end of the scale down to least profit and cash flow (or even loss) at the other end, expressed in dollars, you will find there is a small bunch of customers at either end. There is a small group of customers who you make by far most of your profit from, and equally, there is a small group of customers who cost you most of your money.
The problem is that most small businesses can’t easily run a report like that, but I can tell you it’s worth spending some time figuring it out or buying the software that makes it straightforward.
You will be shocked when you find out how much effort gets wasted on customers who keep you busy but don’t make you any money. Equally, you’ll realise how urgent it is to give more attention to the customers who bring in the majority of your money (because they might leave if you don’t!).
The three C’s: Collect Collect Collect. Why does it matter so much?
I’ve seen many businesses make profit and grow yet struggle and even go bankrupt. The problem in those businesses is cash flow. It may seem obvious, but making profit is pointless if it doesn’t hit your bank account. You’d be surprised how often I talk to business owners who complain about never having enough money to pay the bills while having tens or hundreds of thousands of dollars in outstanding debts.
In my days as a builder, a recurring problem was not finishing the jobs to 100%. Sometimes for months, we’d leave a few defects outstanding because they were small and we had moved on to the next project.
However, that meant we couldn’t collect the final invoice, sometimes for months. In other businesses, I see that people finish the work, but wait until the end of the month or sometimes even longer before they invoice the client. Finally, most small businesses do not have a simple and consistent collection system.
These three factors mean that your business is functioning as a bank for your customers. Your money is in their bank account and it’s of no use to you there. You must then constantly rob Peter to pay Paul, you can’t take advantage of early payment discounts from your suppliers and when your business is in growth mode, the problem compounds exponentially.
It’s even true that you’re cheating your customers by not completing, invoicing or collecting. Your customers want nothing more than to have their work done quickly, and when the work is completed well, your clients feel they are in your debt, and they want to remove that feeling as soon as possible. With every day that passes, that feeling of indebtedness changes and if they don’t receive your invoice until a week or a month later, they’re actually not so keen to pay you anymore.
Profit and cash are not the same. What’s the difference?
As I mentioned above, many businesses fall over even though they make a profit and grow. I also mentioned the compounding problem of growth. Here is a super-simplified example:
Let’s say you start in month 1 with a bank account balance of $1,000. You sell $1000 worth of stuff this month and after expenses, you have $100 leftover. That should mean you are $100 better off at the end of the month than you were at the beginning.
However, if you’ve only collected $500 of that $1,000 in month 1 and the balance follows the month after, you’ll be $400 worse off at the end of month 1 than you were at the beginning. The bank account balance at the start of month 2 is now $600.
Now, if in the next month you grow 20%, sell $1,200 and make the same profit percentage (10%), you will have made a total of $220 ($100 plus $120) profit by the end of month 2.
We’ll assume that you collect at the same level (50% in the month and the rest follows the month after). So, the starting balance at month 2 is $600 plus the remainder of the collections from month 1, making $1,100. Deducting the expenses of month 2 ($1,080) leaves a balance of $20 plus collections for the month of $600, so your balance at the end of month 2 is $620. In other words, after 2 months of profitable and growing trading, you’ve gone backward by $380 – and that’s if everyone pays within payment terms. If only 5% of your customers are late payers, you will go back even further at the end of month 2 (and so on).
This is a highly simplified worked example, but it demonstrates the principle precisely. For this reason, in a growing business, you must give at least equal attention to cash and profit all the time. You could argue that cash is even more important than profit for two reasons:
You can continue to run a business as long as you have cash to pay the bills. There are many examples of big businesses that operated for many years without making profit, but who didn’t run out of cash (Amazon is one such example, Tesla seems to be another current example).
Profit can actually increase your cash stress because more profit leads to paying more tax and tax simply sucks cash out of your business.
Do you know your breakeven? Do you hit it four times every month?
One of the most important things I do with new clients is find their breakeven.
Breakeven is the number of dollars you must sell every month (or every day, week or year) to pay all the bills for that month. In other words, what does it cost to open the doors and turn on the lights? I find that the simplest way to establish your breakeven is this:
Look at last year’s profit and loss (P&L) statement and find the total of all the overheads, fixed costs, rent, insurances, electricity, marketing costs, subscriptions, etc. Add to this the monthly repayments of loans and lease payments. Now divide that number by 12. This is the amount of gross profit that the business must generate every month, 12 months of the year.
By looking at the P&L for last year (or any other representative period), you’ll be able to see what percentage of revenue your gross profit amounts to. For argument’s sake, let’s say your monthly overheads are $20,000 and that, in the past year, your gross profit has been 30% of revenue. Now we can find out how much revenue you need to make to break even by dividing overheads by gross profit to calculate revenue. In this example, it would be $20,000/0.3 = $66,666.00. In other words, based on last year’s figures with a margin for error and inflation of 5% added, you have to sell $70,000 of your products or services every month.
But that’s not the end of the story. In order to survive and actually break even, you must hit this number four times every month:
You must sell $70,000 every month.
You must produce $70,000 worth of goods or services every month.
You must invoice $70,000 every month.
You must collect $70,000 into your bank account every month.
If you miss out by even $1,000 on any one of those four in any month, you’ll have to make up for that $1,000 in the month after.
By introducing this simple discipline, your business and life will never look the same again. By the way, keep in mind that I’ve been ignoring profit in this topic. Obviously, you must make profit as well, but first you must instil the discipline of hitting your breakeven four times every month (at least!).
Numbers: How would you like to be in control of your business?
Finally, I always teach my clients how to put and keep their fingers on the pulse of the key aspects of the health of their business, every week and every month. The numbers. The KPIs.
The breakeven number I talked about above is obviously one of those key numbers, but there are more. Bank balance is a key number. So is gross profit and aged debtors. Then there are various financial ratios, such as the gross profit percentage and ratios like the “debtor days ratio” and the “liquidity ratio”.
Besides financial numbers and ratios, there are many other numbers and ratios in a business that you need to keep an eye on. For example, the number of enquiries in the past month, the conversion rate, average job value, the average sale, warranty returns, customer satisfaction… you name it!
A client of mine who has a furniture removals business knows that he needs to keep a keen eye on his removalist’s wages as a percentage of total sales. If he spends more than 60% of sales on the wages of his boys, he knows he’s not managed the work schedule well enough.
Your business will have its own specific numbers and ratios that can tell you a lot about the health of your business. I often talk about the mailboat report with my clients:
Imagine you are banished to a deserted island in the Pacific, without a mobile phone or email, and the only information you can get about your business is a single sheet of paper delivered by the mailboat every week.
What numbers would have to be on that single sheet of paper to tell you precisely what you needed to know about the health of your business, so you could send immediate instructions back with the mailboat?
All of the above probably sounds like common sense. And it is, there’s probably not a lot you didn’t already know. Profit and cashflow are not inherently complicated concepts to understand. But just like with dieting, we mostly know what we need to know to lose weight (but look at me!!), the trick is in the implementation. That’s where external support comes in and where I and people like me can have a valuable role and make a difference. I’ve written a lot more about coaching, mentoring and finding the right support in your business all through this website and you can download my Free Guide to finding the right coach by clicking on this link.
There are no simple secrets in business, but this one comes close
I’m sometimes asked what the secret of building a great small business is. And that question always reminds me of the wonderful quote by HR Mencken:
“For every complex human problem, there is a solution that’s simple, easy to understand, logical, sensible… And wrong.”
There is no such thing as a single secret of great business. There are a bunch of factors that all have a role to play though, and one of those is controlling the numbers. My most successful clients all have one thing in common, and that is that they manage their business by the numbers. That being the case, which are the key numbers you should focus on in your business?
There’s a few that are obvious:
Net profit before tax (also referred to as EBIT) in dollars and percentage
Your bank balance
What you’re owed and what you owe
How much of what you’re owed is inside your trading terms (30 days, 60 days, 90 days)
Then there’s one number people sometimes forget about and that’s Gross Profit (GP). GP is income minus the direct costs of producing that income. So if you’re selling milk, it’s the total revenue of milk sold minus the total cost of all the milk you’ve bought.
GP is the King of the numbers, because it is the greatest indicator of the health of your business. You know what your overheads are going to be over the year, wages, rent, electricity, insurances, etc. They might change a fair bit from week to week, but not from year to year.
Let’s say you expect them to be $250,000 per year, less $5,000 per week. So by looking at your GP, you can know every week if you are doing fine or not. If you only made $4,500 Gross profit last week, you know you need to make $5,500 GP next week just to break even over the year. My most successful clients all focus on GP.
Fun with Ratios
Here’s another number that can really change your life: The Debtor Days Ratio. It’s a ratio number that’s derived from your balance sheet. Here is a Wikipedia link that explains how you calculate it. It expresses in a single number how long it takes you to get paid on average. The number might be 36.5, which means that on average it takes 36.5 days for you to get an invoice paid.
Focusing on driving the Debtor Days Ratio down and keeping it down will have a massively positive impact on the cashflow in your business, your bank balance in other words.
All of the previous numbers come out of your bookkeeping system, but there are also a bunch of really important numbers that you obtain from different sources.
For example, there are some useful numbers in relation to sales, that you may need to obtain by recording them in a spreadsheet or that you can pull out of a CRM system.
The first one of those is simply the number of inquiries. How many inquiries do you get every week? The next one is the conversion rate. Of the xx inquiries we get every week, what percentage turn into actual business?
Predicting the future
The reason these numbers are so powerful is that they allow you to start to predict the future. If you know that you’ve had 100 inquiries last week and your conversion rate is 25%, then you know you’ll likely have 25 jobs come in the door from those inquiries. If your average sales value is $375 for example, those 100 inquiries will probably generate $9.375 worth of sales.
If your average GP is 50% of revenue, you know you have to generate $10,000 of revenue to break even (50% x $10,000). You will likely fall short by $625 and you are going to have to make that up in the following week(s).
Knowing your sales numbers and conversion rates gives you an early warning system for what’s going well and not so well in your business.
Your small business is special
Every business has its own special numbers that will allow you to keep your finger on the pulse. What matters is that you sit back and ask yourself: what are the key processes and systems in my business that I need to keep an eye on?
Let me give you an example from a service industry. A key determinant of profitability in service industries such as plumbing or washing machine repairs is how often technicians have to go back to a job to fix a problem with the work that was completed.
The margins in these industries are low. Too often it happens that something goes wrong on a job and the technician has to go back the next day and fix the problem, free of charge. “Call-backs” play havoc with Gross Profit in such businesses.
A business owner who manages the business by the numbers will know what the “Call-back” number is in his business from week to week and from technician to technician. Managing that number is key to building a healthy business.
Have you thought about the key numbers in your business?
Business Drivers or Key Performance Indicators (KPIs) are critical information to running successful businesses. They are used by all levels of management in large business to monitor and identify trends in the business and make ongoing adjustments. But understanding KPIs and using them to manage your business is just as important in small business as it is in large organisations.
Typically, KPIs consist of both financial and non-financial numbers.
The key to establishing them in any business however, lies in intimately understanding the business and narrowing down to the critical indicators of the health of your business. The indicators that really tell you what’s going on and how the business is tracking against its strategies.
A course I did recently outlined McDonalds Australia’s business drivers and what their CFO tracked to get an overview of the business. The KPI “dashboard” contained approximately 25 business drivers such as:
Staff Turnover %
Total Sales per Store
One number to rule them all
All pretty dry and unexceptional numbers, but one stood out. Amongst the list of classical accountancy numbers was a single, surprising and simple KPI that summarised the overall health of the business.
So what was this magical KPI?
The number of Happy Meals sold that week….
When you consider this, it makes perfect sense. If Happy Meals are selling well it means many other things must also be true:
Advertising is obviously working as the kids are pestering their parents to go to McDonalds.
If Happy Meals are being sold you can bet that other products were sold on that same order as the parents or older children ordered something as well. This means higher top line sales, and higher $ value per total order. All impacting positively on Gross Margins.
Customer satisfaction is obviously positive as what kid doesn’t love a Happy Meal, and what parent doesn’t enjoy 15 minutes of peace and quiet?
It was an interesting lesson, most specifically because many small and medium businesses use financial data such as gross sales or profit to review performance and look for trends. Perhaps there are non-financial KPI’s that you can use to get a deeper insight in your business. Maybe you can identify your own “Happy Meal” KPI.
Get under the bonnet
The biggest opportunity in the development of your small business is to work out what the critical KPIs for your business are. Finding your KPI’s starts by conducting an objective review of your business from the outside looking in. It forces you to really get under the bonnet.
Ask yourself questions, such as:
Why do my customers buy my product or service?
Do they generally come back?
Do they recommend me or my product to their own networks?
What is my sales pipeline and how does it connect to my delivery and ongoing service or support pipeline?
If I am making products what are the elements in this process that set me apart from the competition?
Are my employees satisfied and is that being conveyed to my customers?
Ultimately conducting this analysis of your business would yield a few critical business drivers that are aligned with your strategy. These can be used to establish the same insights as the largest businesses that will allow you to monitor and review the trends and make the necessary adjustments to ensure your ongoing success.
What’s also important to consider is your ability to obtain and synthesise data from your systems, ultimately turning it into information for decision-making.
Do you know what your business critical KPI’s are and are you tracking them in a consistent manner in order to gain the right insight into your business?
Not all KPI’s are created the same… Some are more equal than others
Mastermind about numbers and measurement with Rick Polito from AXSAPT
The podcast of the Small Business Masterminds Foundation Webinar on Numbers and measurement in May 2105. I am joined by Rick Polito from AXSAPT in Sydney www.axsapt.com.au to help us get to the bottom of how we can go about growing our business with control… how we can gaze into the future with our fingers fiormly on the pulse of the health of our business weekly.
The holy grail of business is to have a business that behaves like a Swiss clock… Tick Tock… Tick Tock… No surprises… it just works, day in day out. Clients walk in the front door… every day, Tick Tock… the products or services get delivered out the backdoor… every day, Tick Tock… The invoices get sent by the bookkeeper… every day, Tick Tock… and the money drops into the bank… every day, Tick Tock, Tick Tock.
Is that your dream too? Do you dream of Swiss clocks?
Fun Businesses Have Rhythm
A Fun business that sustains you for years to come has rhythm, because with rhythm comes predictability and that’s precisely what you are looking for: to know with a fair degree of certainty what is going to happen tomorrow, next week and next month means you can plan and prepare and be pro-active.
Think about it… If you knew with a high degree of accuracy how many contracts you’d sign next month, or how much money would come in the door, or how many widgets you’d produce, or how many emergency callouts you’d have or warranty repairs you’d have to carry out… What difference would that make to how you managed your business and how much Fun you’d have in your business?
If you knew for sure that 3 months from now your business would have 25% more work to carry out than you have right now, you can start looking for the right people now and have them ready for the onslaught in time, instead of managing in crisis, madly running around trying to find someone at the last minute and begging everyone to stay back to finish the work… I know what situation I’d rather be in, don’t you?
Two Mechanisms of Business Predictability
But how can you know all that? Predicting the future is crystal ball gazing, right? The best you’ll ever do is guess, right?
Well no. You can predict the future in business through two mechanisms:
Measuring / Dashboard Management
‘Measuring’ is about taking regular measurements of various systems in your business and looking for trends. I often refer to this aspect of business as “dashboard management” and I have written about the topic extensively in various other places, for example here: https://www.newperspectives.com.au/numbers/ , so I won’t get into further detail about numbers and measurement right now but it is important to know that ‘Meetings’ without ‘Measurement’ are a waste of time… you need both to build predictability into your business.
So the second mechanism is about meetings. A business that sustains you for years to come will have a schedule of regular meetings, daily, weekly, monthly, annually. It can be no other way.
The size of the business will determine the number of meetings but an average small business in a single location based around a service, profession or trade with 5 to 15 employees will likely have a 15-minute catch up at the beginning of each day at a team level; a weekly 1-hour production team “Work in Progresss (WIP)” meeting and a weekly company-wide half hour “huddle”. The last two meetings may be expanded into more comprehensive meetings at the start of every month.
Besides these meetings there may be regular sales team meetings and management team meetings, and last but certainly not least, individual progress or performance meetings between managers and their direct reports, ideally no more than monthly but certainly no more than quarterly.
Jamie’s Panel Beating Shop
To illustrate what I’m talking about I’ll tell you about a client of mine called Jamie who owns a panel beating and spray painting business and who I worked with a few years ago:
Jamie employed about 18 people and the business ran from brushfire to crisis and back to brushfire most of the time, things used to go wrong and profits tended to get lost in the daily and weekly efforts to fix the things that went wrong.
When Jamie and I started working together we quickly realised that the crises were usually caused by a lack of effective communications throughout the business and a lack of cooperation amongst different sections of the business.
So Jamie started by implementing a weekly staff breakfast on Friday mornings. At those times the business would open a little later than normal and a nice spread was laid out for breakfast and everyone took part. At the breakfast Jamie would facilitate discussion amongst his staff to a set agenda that always included a recap of the week… what went well last week, what didn’t go so well last week… and a plan for the next week to address the question: What can we put in place as simple actions that will help us improve next week.
Jamie couldn’t believe how quickly things started to improve. Literally in weeks, he noticed a drop off in crises and the mood in the shop just totally changed.
At the end of that quarter, Jamie couldn’t believe his eyes when he printed out his profit and loss report that showed an increase in net profit of 20% over the previous quarter. Suspicious about the accuracy of the numbers he decided to wait and see what the next few months looked like and the numbers were just as staggering. After 4 months Jamie also noticed that the backlog had shrunk by 50%.
A couple of years later, Jamie has extended the lessons from those first breakfast meetings and has implemented all kinds of rhythms into the business and together with his increased focus on measuring and systems, Jamie’s business actually does run like a Swiss clock these days… Tick Tock… Tick Tock.
Importance of Staff Meetings
A simple weekly breakfast meeting like the one that Jamie instigated in his panel beating shop has two big benefits. First of all it builds team spirit and motivation. For a team to work well together there has to be a certain level of trust and the better you get to know someone the easier it is to learn to trust them.
Most importantly though, the point of a weekly company-wide meeting such as Jamie’s breakfast is that it allows the team to start to become engaged with the company goals. By sharing what went well last week and what didn’t go so well and what to put in place to get the best possible outcomes for the next week, around the table, everyone starts to understand how they fit in the Big Picture and how their efforts have a direct impact on the company as a whole. I refer to these meetings as Huddles. You often see a sporting team doing a huddle before they get onto the field and it’s designed to get everyone on the same page and pulling in the same direction.
Wouldn’t you want your staff to operate like a focused sporting team as well?
A system of formal, regular, structured meeting is an absolute pre-requisite for building a Fun Business that sustains you for years to come… I promise you… Tick Tock… Tick Tock.