A great business-vehicle with a great driver and lots of fuel in the tank allows you to create more great work.
In the past 15 years as a Business-Life Coach I’ve worked with many architects and designers of all types. Design practices and studios are a special kind of business with special challenges around making money and growing. I’m not entirely sure why that is, but I think it has something to do with the design side of things.
Architects have a profession and a set of skills and their business is often built around that set of skills. In that, they are no different than plumbers, mechanics, bookkeepers and lawyers. Their businesses also rest on a set of specific skills and both sell their expertise to their clients. But architects (and designers) often have a passion for their profession that goes deeper. For many architects, architecture is a calling for them. Architects and designers often want to leave their mark on the world with their work. They live for their art as it were and the commercial demands of business can sometimes feel like they are at odds with their art. Making money as an architect is often considered suspect.
Vincent and Pablo
But it doesn’t have to be that way. Of course, we all know the examples of artists who died in poverty and obscurity only to achieve fame and fortune after their death (Vincent van Gogh for example). But equally there are many examples of artists who created great art, left a mark and were commercially successful in their lifetime (Think of the greats of the Italian renaissance or Pablo Picasso in more recent times). Great art doesn’t have to be created in poverty, and nor does great architecture and design.
I like to remind my clients that making money is never the point of business, whether the business is a plumbing business or an architect practice. A business must make money, and generate good cash flow, otherwise it’s a hobby. But the reason it must make money is so that it can achieve it’s Mission… So that it can make good on it’s Purpose in this world.
I recently worked with a client who is an architect. He employs 4 staff who are all architects or interior designers. The business has only just scraped by for a few years now. The practice creates great work and my client is excited about the potential for making his mark on the world of architecture in the future. But he has only just been making ends meet for the past few years. As a consequence he pays himself very little, less than his staff even, and worse, he may well lose some of the staff he loves so dearly in the future, because there is not enough opportunity in the practice for them to develop and grow professionally. My client feels caught in a dilemma. Focusing on making money and growing the business, he believes, means the work will suffer, and he can’t allow that to happen. Hence the needs of the business come second.
I told my client to think of business as a vehicle. The point of a vehicle is to take us from A to B. But the vehicle can only perform that function, if it’s in good state of repair, if it’s filled up with fuel and if the driver knows how to operate the vehicle safely.
Fuel in the tank
Business is just like that. The point of my client’s business-vehicle is to allow him to deliver great architecture for his clients and to make his mark on the world of architecture in general. In order for his vehicle to be able to do so effectively, it needs to be healthy, in a good state of repair, he needs to be a good driver and it needs fuel in the tank. Money is the fuel of business and my client needs to learn what it takes to be a good driver, a good business owner in other words.
The demands of business do not have to be in conflict with what you’re passionate about at all. It is perfectly possible to create great architecture, and beautiful design, while making making great profits and building a healthy growing sustainable business at the same time. As a matter of fact, a healthy profitable business allows you to create great art, if you let it… I promise you.
A business that doesn't make profit and generate cash flow is a hobby
The second of The 7 Big Questions of Small Business, on the lips of most small business owners is: How can I make more profit and generate more cash flow? Personally I believe the question about making money is even more important than the growth question, because I have seen many business 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.
So these are the most important rules about making and keeping money in your business (click on the links for more about each rule below)
Without profit there is no business, but does that mean that 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 has paid a dividend to it’s shareholders every year of it’s existence. Amazon recently purchased the company for untold billions of dollars and John Mackey is 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 (link below) and in it (and various interviews I’ve read and watched with John Mackey), 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 it’s 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 can not perform it’s function.
Someone has to be the most expensive, it might as well be 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 and make profit and be around for the long term, and only very few businesses can do so consistently. The only three big ones I know off that have consistently been able to be the cheapest and build sustainable businesses that stand the test of time, 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 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? Building a Beautiful Business and Life is so much easier to do with high margins than with low ones.
20% Of your customers generate 80% of your profit… Do you know who they are?
You might have heard of the Pareto Principle or the 80/20 rule. The rule can be applied in many situations, but there is no more appropriate topic to apply it to than that of a business and it’s customers. I can just about guarantee you that if you were to run a report today 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 (or even loss) at the other end, expressed in dollars, you will find that there is a small bunch of customers at either end. There is a small group of customers from whom you make by far most of your profit, and equally there is a small group of customers who cost you most of your money.
The problem is that most small businesses aren’t able to run a report like that, easily. I can tell you it’s worth spending some time pulling a report like this together. For that matter, it’s worth getting the software installed that allows you to run a report like this easily. You will be shocked when you find out how much of the effort in your business gets wasted on customers who do nothing for your business but keep you busy, who don’t make you any money. Equally you’ll realise how urgent it is to give more attention to those customers that make you all your money, because God forbid they might leave one day!
The three C’s: Collect Collect Collect. Do you know why it matters so much?
I’ve seen many businesses make profit and grow and yet struggle and even go bankrupt. The problem in those businesses is cash flow. More about cash flow and profit and their tenuous relationship further down. Here I just want to talk about completing the work or delivering the product, invoicing and collecting. It may seem obvious, but making profit is pointless if it doesn’t hit your bank account, but 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 dollars of outstanding debts.
In my own days as a builder, a recurring problem was not finishing the jobs 100%. Sometimes for months, we’d leave a few defects outstanding, because they were small and we were onto the next projects. But 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 and finally, most small businesses do not have a simple and consistent collection system. Those three factors mean that your business is functioning as a bank for your customers. Your money is in their bank account and it’s no use to you there. It means you constantly have to rob Peter to pay Paul and 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 actually even the case that you’re not doing your customers a favour by not completing, invoicing or collecting. Your customers want nothing more than having their work done quickly and cleanly and when the work is completed well, your clients actually 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. Do you know what the difference really is?
As I mentioned above, many businesses fall over even though they make profit and they grow. I also mentioned the compounding problem of growth. I’ll explain the compounding problem in a super simplified example here:
Let’s say you start in month 1 with a bank account balance of $1,000 and you sell $1,000 worth of stuff this month and after expenses you have $100 left over. that should mean you are $100 better off at the end of the month than you were at the beginning.
But if you’ve only collect $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% and sell $1200 and you 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 makes $1,100. Minus 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 backwards even further at the end of month 2 and so on.
Obviously 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 actually more important than profit for two reasons: Firstly, 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 ran 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). And secondly, profit can actually increase your cash stress because profit leads to having to pay tax and tax simply takes cash out of your business.
Do you know your breakeven? And why you must hit it 4 times every month?
One of the most important things I do with new clients when I start working with them is to find their breakeven. Breakeven is the number of dollars you have to sell every month (or every day or week or year) to pay all the bills every month. What does it cost to open the doors and turn on the lights, in other words. I find that the simplest way to establish the breakeven is this:
Step 1: Look at last years Profit and Loss statement and find the total of all the overheads, the fixed costs of the business, rent, insurances, electricity, marketing costs, subscriptions, etc. Add to this the monthly repayments of loans and lease payments you have to make. Now divide that number by 12. This is the amount of gross profit the business has to generate every month, 12 months of the year.
Next step: 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 is. for argument sake, let’s say that your monthly overheads are $20,000. and that in the past year, your Gross profit has been 30% of revenue. Now we can do the sum to find out how much revenue you need to make, to “Break even”. The sum is: Overheads divided by Gross profit = Revenue. Or in this example: $20,000 / 0.3 = $66,666.00. In other words. Based on last years figures with a margin for error and inflation of 5% added, you have to sell $70,000 of your business’s products or services every month.
But that’s not the end of the story. To survive and actually break even you have to hit this number four times every month:
You have sell $70,000 every month.
You have to produce $70,000 worth of goods or services every month.
You have to invoice $70,000 every month.
And you have to collect $70,000 into your bank account every month.
If you miss out by even $1000 on any one of those four in any month, you’ll have to make up for that $1000 in the month after.
By introducing this simple discipline, your business and life will never look the same again. BTW: keep in mind that I’ve been ignoring profit in this topic. Obviously you must make profit as well. But first you must instill the discipline of hitting your breakeven 4 times every month at least.
Numbers: How would you like to be in control of your business?
Lastly 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 KPI’s. The break even 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”. More detail about ratios etc below.
Besides financial numbers and ratios, there are many other numbers and ratios in a business to keep an eye on. For example the number of enquiries in the past month, or the conversion rate (for every 10 enquiries, how many contracts were signed), average job value, or 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 mobile phone or email, and the only information you could get about your business would be a single sheet of paper that would be 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?
Does that mean I’m a fan of McDonalds? No not much, I am an admirer of the model and I make use of McDonalds from time to time, but I’m really really glad there are many other types of restaurants out there, besides McDonalds, even if they don’t make as much money or are as efficient. It would be a poor world if all restaurants were running a business model based on that of McDonalds. But if your aim in life is to make as much money as you possibly can from selling food, you can do a lot worse than read everything you can about the history and business philosphy of Ray Kroc and The Golden Arches.
And the same goes for any other type of business you can think of, from funeral parlors to medical practices and everything in between. Ray Kroc, was a genius, there is no doubt about that and Michael Gerber and many other business gurus since have analysed the McDonalds model and explained how to apply it to every other Small Business out there.
Making money from death
If you own a funeral parlour and you want to absolutelymake more moneythan anyone has ever made from burying people, read “The E-Myth” and apply every word Michael Gerber wrote about the lessons from McDonalds to your business with single minded focus and you’ll never look back … guaranteed.
But if you believe there are other things in life that are important to you besides making money from selling mince meat patties… Read on my friend.
But just like I would be sad (and we would all be very unhealthy) to live in a world where the only restaurants we can eat at are McDonalds, likewise I’d hate to live in a world where all the funeral parlours were run by 18 yr olds who were trained to ask me: “Do you want roses with that?”
The disconnect lies in the misunderstanding most business owners have about the Purpose of Business. Most business owners, business analysts, gurus and advisers will repeat the manta that the purpose of business is to “Maximise Shareholder Value”, to make lots of money in other words.
But if, like me, you believe that making money is a sad and short sighted reason to be in business, all kinds of things become possible instead of McDonalds.
Breaking the law
Don’t get me wrong, a business must make money. There are many things abusiness must do in order to survivehowever. It must operate within the law for example, but we would never maintain that the Mission of our business is to not break the law.
Similarly the notion of making money, the business must make money so that it’s able to do what it is meant to do. In other words, a business that delivers on it’s promise has a reason for existing far beyond “Maximising Shareholder Value”.
In the restaurant industry it may be that the reason for the existence of your business is that you are passionate about unexpected cuisine combinations, French with an Australian twist, for example, or maybe you’re passionate about the sustainability of food, or maybe your passion is about educating disadvantaged youth in the hospitality industry.
There can be many reasons you have started your restaurant. As long as the business makes enough money to be sustainable in the long run, it doesn’t mean you have to turn it into a McDonalds for it to be a great business. Your business is a great business, when it delivers you what you want from it, month in month out, year in year out.
Anchovies and chocolate
So please do yourself (and my stomach) a favour: don’t listen to others’ judgements about your business, and ignore the little voice on your shoulder that tells you to build a McDonalds, because I’d much rather come and eat your pig trotter rolls with anchovy and chocolate sauce than be forced to eat another Big Mac.
Here is the Big question (with a capital “B”) I’d like you to think about:Why does your business exist, what’s it on this earth for, and why would anybody care about that?
Answer that question, decisively, in one bold sentence, and your business and your life will never be the same… I promise you.
So it’s beer o’clock and I want to talk to you about toilet paper. Have I had a few too many already? No! I’ve just been reading Mike Michalowicz’s book, ‘The Toilet Paper Entrepreneur’ today.
Mike says, “Owning a business is not about working your arse off for the sake of trying to squeeze out a living. It is not about making tons of money at the expense of losing tons of life. It is about maximising life, bettering your life and the life of others, which ironically fattens your purse.”
This makes sense to me; you too? I recently heard an American marketing guru say it another way, “The purpose of business is not to make money; that would be like saying that the purpose of a human being is to eat food.”
Sure we need food or we can’t fulfil our purpose, and in the same way a business needs to make money otherwise we can’t deliver on the purpose of the business.
But (and this is the clincher) the purpose of the busines is something much more important than making money, and it’s different for every business on the planet.
So from beer o’clock and toilet paper we actually ended with a pretty profound thought. Cool, huh!