Edition 437 – Behind The Numbers

I have a saying that’s almost become a philosophy – “Numbers are reasons in disguise”. I’ve long subscribed to the fact that the financial statements, nor the accounting systems maintained by most small and family businesses, tell the full story of what’s happening inside of that business.

In a recent client meeting, where we were putting together the foundations of the 2024/2025 budget, it was my series of questions about what makes up the revenue, that had the business owners not only stop and think about the work they’re doing, but what they should be doing as part of the future strategic direction of the business.

My volley of questions identified that:

1. This business has three very specific types of work – even though, on the face of it, they’re working in the same industry, doing the same thing, for the same businesses, every day.
2. Those three specific types of work, are at varying margins (they’re in the building and construction industry) – with the highest margins above 30% and the lowest below 20%.
3. There are three different levels of conversion for the work they undertake in their business. So, for one type of work, one dollar of quoted works leads to five dollars of variations. For another type of work, one dollar of quoted works leads to 20 cents of variations.

All of this means that when you’re setting your revenue targets for your business, you need to stop and think about:

1. The type of work you’re undertaking.
2. The margin at which you’re operating.
3. The level of overhead you’re incurring in business.
4. What your profit target should be.

So, a business with $750K in overheads, and operating at a 20% margin, with a profit target of $250K, requires a revenue target of $5.00 million.

Similarly, that same business, with $750K in overheads and operating at a 30% margin, with a profit target of $250K, requires a revenue target of $3.33 million.

In the second example, if you get your assumptions wrong, and are aiming for a $3.33 million turnover, but can only achieve a 20% margin with $750K in overheads, you’ll end up with a loss of $83K – a $333K turnaround from your original profit target of $250K.

What’s behind the number that you’re showing in your business?

Can you state, confidently, what work you’re aiming for, and at what margin you can achieve it?

Are you driving the marketing activities of your business, so that it brings in the type of work that you want, at the margin that you need, to earn the profit result you desire?

All of this is why, numbers are reasons in disguise.

This Week’s Tip

“Building a dashboard to monitor the activities that take place in your business, that drive revenue,
are critical to understanding just what makes your business tick.”