Edition 531 – Know Your Numbers
What never ceases to amaze me is how few business owners actually understand the numbers in their business. In fact, I’d go further and say a lot of them don’t know what they are at all.
Like a really interesting business that manufactures a number of different products, with a wide range of revenues and profit margins attached to it.
We’re at the whiteboard, one day, pulling apart some numbers, and the family in the room only start to realise why I’m asking the questions I’m asking when we jot down, side by side, the various main product lines. Three products. Base. Middle of the road. Premium.
Premium’s sale price is 2.5 times the price of Base. Premium’s profit margin is 400% higher than Base, or 4.0 times. Someone pipes up that there’s not really a market for the Premium product. That someone is not armed with the facts, but with history. What the business has always done. How it’s always built its profit.
Except those armed with the facts, reply with the facts. Like the fact that Premium is a much bigger seller than you’d think. Like the fact that Premium’s market has been continuing to build in recent years. The response carries weight because we’re working with the family to help them not only understand the numbers but also where profit is made in the business.
In a separate, really interesting business, we’re pulling apart the numbers in even greater detail. The business has experienced rapid growth and has borrowed money to go about doing it. Except the cost of borrowing is merely a given, until, once again, the whiteboard is wheeled out, the coloured marker pens are placed on the desk, and we start to separate what it costs to make the finished product in this business.
In this example, the cost of funding the rapid expansion clearly comes into focus when it’s pointed out that 25% of production, at their current profit margin, is funnelled back into servicing the debt. They knew as much by looking at the bank account. But they didn’t know as much, because no one had written it in such graphic detail on the whiteboard previously. In bold colours. In simple to understand numbers. That they could drop their output by 20%, alleviate the debt burden, grow more slowly, and still achieve almost the same profit result.
In that session, you could almost see the weight lift off the shoulders of the owners. The same owners, who are excited for the future direction of the business, but nervous about the level of funding the business requires, for it’s a cash-hungry beast we’re dealing with here.
If you don’t understand the numbers in your business, ask someone to help you.
If you do understand the numbers in your business, explain them to someone. They often say, to teach is to learn, and this rings true when you pull apart those numbers.
When you understand the numbers, you understand what makes the business tick.
When you understand what makes the business tick, the next greatest revelation usually is that the beast you are managing doesn’t actually need to be as big or as complicated as it is.
It could be smaller. Simpler. With less revenue, but the same or even better profit.
The truth is in there if you go looking for it.
This Week’s Tip
“I can’t begin to tell you the number of times over the years where businesses we’ve worked with have dropped revenue, yet increased profit.”