Does Your Business Have a Heart Rate Monitor?
Business struggling? Cash flow poor? It's difficult. So what’s the problem?
Where do we find the answers? Look at sales figures, examine costs, review debtors and check overheads. Yes all this helps. The complete answer will always be in the monthly report. Don’t have one? That is now the problem.
We see too many businesses with inadequate financial and management information. An accurate monthly profit and loss report will indicate the issues to work on. Compare the numbers to the same period last year and to budget.
There is absolutely no substitute for timely and accurate monthly information. It is the heart rate monitor of the business. There are plenty of solutions available to assist getting the right information.
Once we have the information then what do we look at? Sales figures are an important indicator of course. Is the business growing? And which products are performing? Which are lagging?
Gross margin – this is the key profit driver. Is the sales income profitable? Are the costs of sales too high to deliver an acceptable margin? What is an ‘acceptable margin’? This will vary from business to business, but in general it will depend upon your overhead structure. The higher your overheads the greater gross margin you will need. If you are still not sure, look at industry trends from similar industries.
Cutting overheads is often a soft target for profit improvement. Sometimes this can be false economy. Sales might be down so we should reduce advertising? Well maybe not; it might just be the right time to actually increase advertising cost to drive increased sales. Rather than the overheads being the problem, it is often the cost of sales – operating expenses. This is usually a big number. Are you getting the best deal from equipment suppliers? Maybe you need to shop around more to reduce the cost of sales.
Whatever the issue, the figures will tell the story. Take the heart rate of your business every month. Examine the information and make sure you understand what it is telling you.
You are now in control. The important thing now is to take action to work on problem issues; whether it be declining sales or escalating costs. The problems will nearly always be within your control. They will not be the ‘marketplace’ or the ‘economy’. Problems do not generally fix themselves. Over time they will probably get worse. Don’t wait for things to just get better. Use the information from your heart rate monitor to review and make changes.
If you are struggling to get started, reach out for help www.thebusinessengine.co.nz