Know your margins

The number 1 piece of advice I give to business owners is – know your margins.  No matter what kind of business you are in you need to know how much money it is costing you to deliver each $1 of revenue.

And this advice applies regardless of your stage of business or what kind of business you are in.

Services business

Whether you are a solo operator or run an agency or professional services firm you need to have an eye on margins to ensure that you are delivering your jobs profitability and covering overheads.  Some points to consider

  • Do you have target utilisation rates for your billable staff and do you monitor actual utilisation against this?
  • Do you have a rate card for your staff that works out their cost (taking into account unbillable time) and has a target profitability associated with them
  • How do you monitor actual vs budgeted effort to make sure that scope creep is managed and further fees are requested if additional work is undertaken
  • How do you factor overheads into your rate card to ensure they are covered?
  • Do you know your breakeven level of sales? 

Product business

A common mistake here is not factoring in all the costs involved in the final product

  • Do you know how much it costs to produce each unit?
  • Have you factored in packaging and shipping/logistics costs into this?
  • Have you factored in your time to produce?
  • Do you know your margins for wholesale vs retail?
  • How much of a margin do you make per unit or product line?
  • What level of sales do you need to make to ensure that margin covers your overheads? 
  • Plan for promotional spend and make sure your price allows you scope to reduce and still meet your average target margin. 

Early stage/start up 

Even when you are in the early stages of a business, when it might all be about customer acquisition, ultimately you need to know that you are building a business that is sustainable.

  • Have you worked out your unit economics? 
  • If your business requires upfront investment to build your customers do you know how many you need to breakeven?
  • As you start to acquire customers are you reviewing your unit economics now that you have proof points in your data?

 

Business preparing for sale

Knowing your margins and having clear data to back up your statements is critical when preparing your business for sale.  Often margins are “known” based on gut feel and historical data that may not be borne out in current figures

  • Are you reporting systems set up to clearly show margins by customer, products or divisions.  
  • If your forecasting model is showing margins in a certain way do your actuals also align with this?

 

How confident are you with the margins in your business today?

You’d get more love from your investors if you just knew how to talk to your numbers

Huge frustration investors have with founders is the inability to communicate effectively around their numbers.  And for founders, who are usually doing this unknowingly, it can, worst case, become a roadblock when they need support or more funds.  And the best case it means they are not getting the most out of the relationship.

 

So how should you be talking communicating your financials?  Here are a few starters

 

1) Understand your key business metrics and talk to them consistently.

 

The key metrics will be different from business to business but typical metrics could cover

 

  • Topline revenue, split by geography or product if relevant
  • Gross margin
  • Net margin
  • Number of customers
  • Average revenue or spend per customer
  • New customers or clients
  • Customer churn (lost customers)
  • Net new customers or clients (Gross new less lost customers)
  • Customer acquisition cost

 

The important thing here is not to just understand what the key metrics are driving the business but maintaining consistency in the calculation (unless there is a clear reason, clearly communicated for the change) and show trending over time so investors can understand what is happening in the business

 

2) Communicate your financials regularly

 

“Regularly” means different things to different people so understanding the frequency that is expected is helpful but ultimately whatever the timeframe (eg. monthly or quarterly) delivering on the agreed commitment does a couple of things.

 

  • Positions you as someone who can be trusted to do what they say they are going to do and that trust has a halo effect around the rest of the business
  • Keeps you top of mind for your investors when they receive that regular report.  Great investors not only have funds but also a useful network that you can tap into.  You want your business to be one they are constantly thinking about, not one they only hear from when there is trouble   

 

3) Balance detail with business effort

 

Particularly in a business with fast growth and lean resources the financials you report shouldn’t be onerously time-consuming.  Putting the management systems in place to easily extract the information is really important.  It’s not the best use of your time as a founder to be spending significant amounts of time report collating.  If information is not yet easily accessible be up front with your investors and let them know, whilst in the background working on an automated fix.  Accessing these key metrics easily should be a priority, not for reporting to your investors, but because they are key to understanding your own business performance.

 

Budgets, Forecasts and Business cases – what’s the difference between them and why do you use them

Budgets

Budgets have traditionally been constructed once a year and become your yardstick to measure progress against. 

 

Pros – They keep you honest because you have fixed goalposts to measure against.   

Cons – For most businesses, and particularly coming out of a particularly turbulent two years, are they just an outdated concept?  Forbes wrote a great article recently on why they believe exactly that and worse, if not managed properly can encourage flawed decision making within a business e.g. departments using their budget up, regardless of whether they need it, so that they keep their allocation for the following year.  Plus in a traditional budget cycle information is outdated almost as soon as it is pulled together 

 

What’s the solution?

For long range forecasts set high level targets eg. revenue, gross margin and profit, underpinned by specific business assumptions so that you have a clear goal that you are aiming for and can measure progress against.  

 

Forecasts 

Is this Budgets 2.0?  Forecasts are updated on a rolling basis as business drivers and outlooks change.  This allows businesses to have a more realistic view, particularly in the short term of 6-12 months 

 

Pros – your planning process remains live with a current view of where your business is taking you.

Cons – if your systems aren’t set up properly you can spend more time planning than executing.  Forecasts are best to review short term scenarios so it’s hard to see the impact on the long term financial outlook particularly if you are trying to make investment decisions which have a longer timeframe for payback or are being implemented for strategic reasons that will only bear fruit outside of the forecast window.

 

What’s the solution?

Use automated tools that easily sit on top of your financial systems in order to pull through actuals and update drivers    

 

Business cases 

These sit outside of the “whole business” forecasts and are used to stress test scenarios prior to making investment decisions.

 

Business cases should be reviewed with two lenses 1) the incremental cost and revenue involved and 2) a fully costed version which loads in an allocation of fixed costs.  The reason for reviewing this in both ways allows you to assess the short and long term impact.  In the first instance using just incremental financial impacts lets you see the immediate impact and the cost of testing the new initiative.  Subsequently the fully costed version will give a more realistic view on what the longer term financial impact is on the business.  For example there may be additional incremental headcount with no requirement for additional office space immediately.  However over time those additional heads will incur associated costs so looking at a fully costed scenario will give a better indication of its long term profitability.

 

What’s the solution?

Use the incremental view to assess the short term investment required and impact on the business. Then layer the fully costs version over the existing BAU (business as usual) forecast to see the financial impact on the whole business over time.

 

How do your business processes stack up against this lens?  If you need a hand feel free to reach out for a free 20 minute consultation https://calendly.com/michelle-cfo/20-minute-initial-consultation or email me at michelle@lanternpartners.com.au 

How to talk finance to your board

Not all businesses have, or need, boards but if you do then how you talk to your board is a key part of getting the most value from the relationship.

 

1.  Make sure first you are aligned with your board as to what success looks like

Before you can work out how, you need to know what you should be talking to the board about.  

The financials you report on should tell the story of the strategy and goals of the organisation.  

So first you need to make sure that there is an agreed, documented framework for this.  At a minimum you need to get this signed off every year but for earlier stage, faster moving businesses it may be more frequent. 

 

2. Define the metrics that demonstrate you are on track towards your goals

You need to ask yourself what are the key metrics which show progress against those goals.  

There will be traditional financial metrics such as revenue and costs vs budget. However other key metrics are needed

  • How are you measuring the activities that you need to execute in order to meet your financial targets
    • Sales pipeline
    • Recruitment of sales leads
    • Marketing plan and execution
    • Hiring plans and headcount to effectively run your business
  • Effectiveness of spend eg.
    • Revenue per salesperson or location 
    • Product or service line margin
  • Quality of revenue
    • If your business objectives are to reduce client concentration, achieving your budgeted revenue through growing your existing clients rather than new clients does not align with your goals
    • Similarly if you want to increase sales in higher margin products you will need to provide this level of commentary in reporting to the board.

 

3. Consider the makeup of the board and their areas of focus.  Non-exec and advisory boards are usually brought in because of their specific experience or expertise so make sure you’re 

a) utilising this experience and asking their advice and 

b) addressing their hot buttons in your board communications.

 

4. Consistency, summary and visualisation

There’s a lot of information you can communicate but the information you should communicate to the board will be at a much higher level than what you use to make your day to day decisions.  However, remember that your board is not as involved in the day to day operations as you are, so ensure clarity isn’t lost as you do this.

Presenting the information consistently can really help the board quickly understand information. If reports are presented in a consistent order and with a consistent level of detail, bonus points for visual representation of data ie. graphs and charts. Make it easy for them to see the information you are trying to convey.  

There are some great reporting tools in the market which link directly to your accounting system and produce professional documents in seconds so you can spend time on the commentary and discussion in the meeting itself.

 

5. Agree actions and next steps 

Whilst the discussion in the meeting might be illuminating change only comes with accountability and action.  To this end agree actions and responsibilities in the meeting and report back on them at the next board meeting.

 

Are you in need of a financial health check? Book a FREE 20 minute discovery call  Email me at 

10 things boxing has taught me about business…and life

I recently started boxing again after a long hiatus and I’m loving it, but more than just getting back in the ring and improving my fitness, it is also reminding me how valuable the lessons I’ve learned from boxing are for business and life in general.

Technique trumps power

When I started boxing I was REALLY unfit.  The only way I could keep up in a session was to really focus on my technique and get maximum effectiveness from my boxing…so I didn’t die.  I see it now with new boxers who are, often, really strong but have no technique.  I’m wincing as they flail around like drunk kangaroos, thumping bags and pads indiscriminately and funnily enough they are the ones that end up exhausted and with shoulder injuries.  So it is in business, get your technique right from the beginning. That discipline will serve you well in the future and as you build your business strength you’ll be unstoppable.

Focus is everything

From time to time I like to pretend I can multitask and most of the time I believe it.  When I box I realise how utterly flawed that thinking is.  If I try to chat, or my mind drifts, when I’m sparring I invariably screw something up in the combination, get hit or (accidentally) hit someone else in the face.  It is impossible to truly focus on more than one task at a time.  When I have something really important to do at work, I try to keep that in mind.

Focus is everything (part 2)

When I first started boxing I thought the stress relief would come from the cardio and the actual punching.  So wrong.  When you’re boxing you can’t think about anything else because you’ll get hurt (Refer point 2) or hurt someone else.  There really is something special about meditative focus.  In business it is this type of focus which can really propel your business forward by giving you clarity and outside of business allows you to completely switch off and recharge.  Boxing has helped me improve this mind muscle.

You learn more with someone than alone

I’ve always learnt far more boxing with a partner than on a bag.  Humans are unpredictable and keep you on your toes.  Whether you are holding the pads or actually boxing you have to keep your wits about you as every combination always happens in a slightly different way.  You need the same in business, you can’t learn in a vacuum.  It might feel safer, you might not be ready to move off that bag, but the sooner you can test your business with real people you’ll grow.

Mix it up

Similarly, if you only box with one partner it might feel really comfortable but there is nothing better for switching up a gear than getting out of your comfort zone.  For me, boxing with a southpaw (leftie) is frequently confusing but really makes me think!  People that operate in the opposite way from you often have something to teach you.

The benefit of the right equipment

Equipment definitely isn’t everything but when I started wrapping my hands and wearing proper gloves my knuckles didn’t feel like they had just had a fight with a cheese grater and my wrists were supported enough to step up the punching power.  In business, pick the right time to invest in the right equipment, it will protect you and allow you to flex your business muscle.

Keep your guard up!

I don’t mean you should walk through your life on the defensive but one of the first things you are taught when you box is to keep your guard up and it’s a good habit.  Even if you aren’t boxing competitively, keeping your guard up protects you if you momentarily lose concentration or from an accidental, unforeseen swipe.  This is precisely why you need to keep your business guard up, buy the right insurance and put in place the right frameworks so you can keep your focus on your business and know you are protected from what you don’t see coming.

Learn where your power comes from

The effectiveness of your punch doesn’t come from your fists.  The power comes from your whole body.  When you use your whole body you get more power with less effort.  Similarly, in business, work out how you operate most effectively and efficiently and how you can get the best results from your efforts.

Get a great trainer

A great coach is worth their weight in gold.  I had an amazing trainer when i started boxing and he taught me so much from day 1 that I still use today.  He competed globally and was incredibly skilled but he was also hugely invested in his students and wanted them to succeed no matter their level.  If you can get that for your business, grab it!

Breathe

Such a cliche but so important.  If you don’t remember to breathe you will fall over, no matter how good you are.  So it is in business and in life. BREATHE.