Prosecco and Jam Doughnuts

Prosecco and Jam Doughnuts

Profit, Prosecco and Jam Doughnuts, and a Plan

Do you prefer using the carrot or the stick? What about if you are the only one in your business – how can you sensibly apply a ‘carrot and stick’ approach to yourself? Either way, you’ve got to set some performance benchmarks for yourself – either as a solo entrepreneur or as a brick and mortar business owner. But how do you hold yourself accountable to those goals? How do you set about rewarding yourself? Do you just ‘carry on’ oblivious to the sense of achievement?

I have found that external input tends to increase accountability to oneself – the fact is, it is just harder to say ‘I didn’t have time’, or ‘xyz excuse’ stopped me from doing this.

I love seeing the sense of achievement in my clients. For those that have truly invested themselves and their teams (if they have one) into growing their business in a sustainable and efficient way, I believe that they should be rewarded. By me.

The First Quarter

We’d initially set the simplest of benchmarks – outperform against the previous year. Historic data was ‘thin’, but we could track some simple metrics – sales, gross profit and net profit. After all, these were essentially the three headline figures that we needed to monitor as the business grew.

So here’s the comparison of performance for the first quarter:

2015-16 (Q1) 2016-17 (Q1) + / – + / – %
Sales 42.1 57.6 + 15.5 + 37%
Gross Profit 23.0 38.1 + 15.1 + 66%
Gross Margin 54.6% 66.1%
Net Profit 5.6 20.4 + 14.8 + 264%
Net Margin 13.3% 35.4%

Now, this is a relatively small company (turnover was around £180k ($250k) in 2015-16) but it demonstrates what is possible when you have a plan and are determined to improve your business. We worked through the sales, margin, overhead model and applied it. What is more remarkable however is the huge increase in efficiency – the increase in revenue is almost exactly the same as the increase in gross profit and net profit – that effectively means that almost every extra dollar of the sale went straight to the bottom line.

Focusing on the only 3 things that will ever improve your profitability was the driver for this. Specific tactical actions and processes created the result.

So Prosecco and jam doughnuts were the rewards for the business owners. It may not seem like much (especially when you find out it was only half a bottle of Prosecco!), but it symbolises the need for celebration for achieving goals and outperforming against benchmarks that were set. The reward came with an explanation and a promise – that it was only half a bottle because performance had only been measured over one quarter – it wasn’t consistent outperformance yet. The promise was that the prosecco would be upgraded in time if the whole year created a consistent proof.

So here’s what happened for the full year:

2015-16 (Q1-4) 2016-17 (Q1-4) + / – + / – %
Sales 181.0 251.9 + 70.9 + 39%
Gross Profit 77.7 142.3 + 64.6 + 83%
Gross Margin 42.9% 56.5%
Net Profit 14.2 57.9 + 43.7 + 307%
Net Margin 7.8% 23.0%

When you see results like this…why would anyone not want to celebrate. Besides it sets everyone up in a positive frame of mind for the meeting ahead, and whatever is next.

For a business that produces (manufactures) an end product and incurs third-party costs in order to make that product, that is a fabulous example of concentrating on making sure that the increase in revenue is profitable revenue – again, almost all of the additional revenue has dropped through to the gross profit level. The increase in net profit, however, hadn’t kept pace with this statistic because of two things which occurred in the second half of the year – the introduction of a general manager role (who also had a sales and business development background – great for the set up for growth in the following year), and an extra member of staff on the production side of the business, plus some additional salary awarded to the business owners at the year end in recognition of their most profitable year ever (and tax deductible for the business!)

The Prosecco was upgraded to Champagne for the business owners, and all of the staff received Prosecco as well…along with more jam doughnuts.

All too often we don’t celebrate. And we should. It’s a bit like saying ‘thank you’ to your staff or team (internal or external) – we should do it more often than we do.

Only 3 Things….

Only 3 Things….

Too much hustle, not enough focus

It is a common question – “How do I make more profit?” All too often it is answered by thinking that the answer is to ‘do more’. Clearly, if you aren’t doing anything, then the answer will definitely start with that!

But ‘doing more’ must be the answer, because that’s how to scale a business, right? Doing more may well result in a ‘bigger’ business – bigger turnover (sales), bigger staff, bigger premises (for the brick and mortar businesses), bigger budgets, bigger marketing spend…and so the list goes on…and on…

The only thing is, ‘doing more’ may also add ‘bigger losses’ to the list as well. When ‘doing more’ goes unchecked, or even worse when there are no existing metrics in place to track any of this information through on a quarterly (at least) or monthly (preferably) basis, how can you possibly know that when you ‘do more’ it will result in ‘bigger profits’. And let’s face it, no-one wants to work harder for no extra benefit…

So if ‘doing more’ isn’t the answer, then what is? PS – it may be the case that ‘doing more’ is the right thing, but we need to make sure that we do more of the efficient and effective things when it comes to profit generation.

We need a plan – we need focus. The question “How do I make more profit?” is too big a question in itself to answer sensibly – there are *millions* of ways in which we could make more profit – the secret lies in simplicity and being able to focus on strategy and consequent tactics in such a way that we can break down the question into some bite-sized chunks. Quite apart from anything else, as a business owner/entrepreneur, it’s not like you don’t have anything else to be working on day to day in your business, is it?

So here’s a simple 3 part plan for you – take action, and you will see positive results:

Sales

It is not just about selling more – you need to understand who you are selling what to first. You need to understand your breakdown of clients.

Think about it like this: if all you see on a financial report is:

‘Sales = x’, that doesn’t really help you that much.

Imagine however it looked like this:

‘Sales (domestic) = y’, and

‘Sales (international) = z’

And when added together, these now made up the line: ‘Total Sales = x’

You now have a lot more information about your sales – the relative proportions of your domestic and international clients by their sales levels. Think about what you could now do if you understood that your domestic sales were 1%, 10%, 25%, 50%, 75%, 90% etc of the total – how would that start to guide your thinking? Is it easier or harder / more or less expensive to reach domestic customers? Are you vulnerable in your domestic market for some reason that means you need to focus on international growth perhaps? Is it easy to get your products registered in international territories? Is there a long lead time attached to that? Do international customers place larger orders, but maybe less frequently?

Your ability to think more clearly about the ways in which you may choose to expend energy in the pursuit of profit (‘do more’) is now far more apparent.

Margin

Let’s start with understanding what margin actually is:

Sales – Cost of Goods Sold (Direct Costs) = Gross Profit ($)

Gross Profit / Sales = Gross Margin (%)

So, it is basically what is left once we take away the cost of making the goods that we actually sold (for a product based business). For a service-based business, it is the cost of the labour that actually ‘did the work’.

Simply put, therefore, we need to understand how much gross profit we make (margin) for each of the products that we make (or serve with). Similar to the example with sales, understanding which products/services yield the greatest amount of gross profit will, therefore, help us determine which products/services we want to invest our time in producing and selling – where is the most gross profit to be made? We can then check as we grow what happens to our gross margin overall.

Overheads

Whilst sales and margin are typically things that we feel we need to increase, overheads (expenses) are things that need to be reduced. As businesses grow, they tend to ‘bloat’ from an overhead point of view – because there is ostensibly more ‘money’ available, we tend to think that we have more to spend, but all too often, the spending is not focused and effective. Consequently, costs rise and turnover (along with gross profit) doesn’t necessarily rise as well.

Imagine spending additional money on a certain type of marketing expense when you don’t actually know whether or not that type of marketing produces a return (or specifically can’t be matched to an upturn in sales).

The second issue with overheads is that people tend to look for the ‘extras’, rather than the items where the money is really being spent – consequently, people can spend a huge amount of effort and time trying to cut down a stationery bill, when that may only be a relatively small part of the overall expenditure, whilst simultaneously ignoring their administrative staff cost, or the fuel bill which may be far more material costs to the business – if these are being overspent on because of poor management, then dealing with these issues will help the bottom line far more than changing stationery supplier. You have to be aware of the relativity of each type of expense against the others, and its overall impact on the business first.

So – review your overheads, and for simplicity, break them down into categories – I often find that I will start to review a business based on the following broad categories:

Admin Salaries and associated employment costs

Property Costs and associated expenses (eg rent, rates, utilities)

Premises Costs (repairs & renewals, cleaning etc)

Insurance

Professional, Consulting, HR, Financial & Legal

Bank Charges and Finance Costs

Motor Expenses (including Vehicle Insurance, Fuel, Vehicle Tax, Parking, Mileage etc)

Travel & Subsistence

Entertainment

General Office Expenses (stationery, telephone, postage, computer supplies etc)

Marketing (split online / offline)

Subscriptions

You will find this a much easier task if you break the expenses down into ‘similar’ things – that way you get to consider a section ‘as a whole’ for its impact (good, necessary or bad) as well.

Conclusion

Less hustle, more focus has to be the way forward (unless you enjoy doing lots of work for little potential benefit). It is the way to create a profit intentionally in your business.

PS – Sales, Margin and Overhead are the only 3 things that you have to manipulate and improve your profitability with – so focus specifically on them to generate the best result – don’t waste your time trying to answer that ‘big’ question!