There is an old saying: “If you aim at nothing, you will hit the target with amazing accuracy.”
If you want to improve the results in your business, then you need a target to aim for and a system for monitoring progress.
As a business owner, here are a few questions you need to ask yourself at this time of year:
- How were your results against your target for this year?
- Did you have a target for this year?
- Are you happy with the results for this year?
- How accurate are the results for this year?
- What do you want to achieve next year? and
- What can you learn from this year to improve next year’s results?
It can be difficult to find the time to consider these issues when you are busy running a business, but a small amount of time spent now can pay big dividends for your results next year.
Here are a few key issues you need to consider and get control of:
- Compare results — Most businesses conduct many transactions and it can be difficult to track them all. By having a budget, you have a regular procedure for checking that income and costs are on track. You can see very quickly if margins are slipping, find out why and take corrective action.
- Identify overspending — If you don’t have a monthly budget, you may not find out until well after the end of the financial year (sometimes 18 months later, if you rely on accounts produced for tax) that you have overspent on some items. So, create yourself a budget and check your spending!
- Spending limits — A budget lets your staff know there are limits on spending. It’s amazing how some staff just keep on spending if they don’t have a limit. A really valuable tool to use here is a ‘purchase order’. This is a one-page document that is completed by staff who want to order/buy something over a certain value that needs to be authoristed by a senior manager prior to order placement.
- Funding — If you want to acquire new business funding or roll-over current lending, you will definitely be required to produce a budget and probably a business plan — a lending institution needs to be confident you have thought through your business and funding requirements. If it can see that you regularly measure actual versus budgeted results, it will feel much more comfortable with having you as a borrower.
- Break-even — Some people think it’s too hard to do a budget, because they can’t predict what they will sell. This should not be an excuse! Most businesses know what their direct costs and overheads are, so it should be possible to calculate the break-even point at which the level of income you secure covers costs. Everything after that is profit.
To calculate your break-even point, use a spreadsheet and enter your income, costs and overheads.
Subtract costs from income to determine your break-even point.
Once you have made this calculation, you’ll know what you need to achieve in sales and gross profit to cover overheads and reach break-even point.
Each month, measure these numbers while also keeping an eye on overheads.
Anything you can do to increase the net profit of your business can have a big impact on the value of your business.
As many businesses are sold on a multiple of Earnings Before Interest and Tax (EBIT), it makes sense to increase this result.
Many businesses have been run in the past with the aim of minimising tax, but this isn’t a good strategy if you want to sell your business in order to retire or do something else.
Multiples of EBIT vary depending on the industry and business management, but say it is three — this means that for every extra dollar you can add to net profit, three dollars are added onto the value of the business.
If you could increase your profit from $100,000 to $200,000, you would add an extra $300,000 onto the sale price and potential contribution to your superannuation fund on retirement or exit from the business.
It makes sense to invest a little time planning for the profit you want to make in your business and reap the increased business value benefits down the track.
Sue Hirst is a Director and Co -Founder of CFO On-Call.