‘How To’ Coaching series – Activity 39

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 39 – I regularly review my Margins – daily/weekly/monthly

Following on from blog 38, ‘I know my Margins’, it is a really good idea to monitor the results regularly, then you can decide what aspects of your business are best to develop; or drop/amend if that is your finding.

You can set up a simple report that shows the ongoing results of your margins.  These should be viewed as required to work with your business.

If you have a fast-paced business, you may review your margins daily.  A Stock Exchange monitors the results in real-time.  That’s because a prompt change/correction will have a dramatic effect on the outcome of the business transactions.

A company that works on a multi-year cycle, might review the margins less often.  They would use a different measure to see how they are doing – expected income vs costs against the planed budget to show the profitability of the offering.

 The HowTo bit:

As an example, build a spreadsheet showing income for a given time period and list outgoings (cost of sales & a segment of the operating costs) underneath.  This could look like the table below.

Profit/Loss table

  Monday Tuesday Wednesday Thursday Friday
Income 1000 850 820 1250 915
Cost of sales 180 160 265 190 185
Overheads 300 300 600 300 300
Profit/Loss 520 390 -45 760 430

This table shows the income and costs per day for activity; it does not necessarily reflect the Cash Flow in the business.  The initial questions I would be asking are:  Why are the costs of sales and overheads more on the Wednesday.  It could be that a certain offering is not profitable.  Using the information gives you a reasonable starting point for your investigations.  In real life, the figures are probably not going to be so obvious, so a more detailed table then this example, maybe with the addition of a bar chart diagram, could prove invaluable.

If you would like help defining how you will regularly review your margins, Contact Us

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‘How To’ Coaching series – Activity 38

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 38 – I know my Margins

What margins are we talking about?  Gross profit margin or Net profit margin?

Gross Profit Margin is important to understand that your sales cover the cost of sales.  Net Profit Margin shows your overall profitability.

Margin is expressed as a percentage.  For example, a net profit margin of 10% shows that for every £100 of income, your business gets to keep £10 (in this case were focusing on EBIT – Earnings Before Interest and Tax)

What is the difference between gross profit and net profit?  The gross profit margin is the ratio of sales income, less the direct cost of those sales.  The net profit margin is the gross profit margin, minus operating expenses.

Knowing your overall Net margin is important; so is knowing the Net margins of all your individual offerings.  That way you can see what is feeding the company.  When you understand your margins, you can decide if you need to re-price (or even drop) profitable/unprofitable products/services.

The ‘HowTo’ bit:

As well as the calculation for working out your margins, define what margins you want to monitor.

The key is that you know what your margins are.  So, set up a regular reporting schedule and make sure you have the information to hand.

Have an easily accessible report; I use a spreadsheet, into which I feed the sales, costs of sales and a percentage of the overheads. The output is read as a percentage. This gives you a view of what is happening.  This is also useful for forecasting future profit/loss on individual items as well as for the overall picture.

If you would like assistance to define your margins and set up a consistent mechanism for readily ‘knowing your Margins’ Contact Us

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‘How To’ Coaching series – Activity 37

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 37 – I regularly review my average sales figures – daily/weekly/monthly

In the previous blog (#36) we looked at how you determine average sales value/price.

This is something that needs to be done regularly.  The schedule of measurement depends on how many products (or services) you sell in a given timeframe.

For instance, if your sales are high in number per day, you may choose to measure the sales figures daily.  Or, as some supermarkets do, hourly.

A big retailer will monitor sales of specific items to understand buying patterns and the impacts of marketing initiatives and other factors.  A large construction firm might monitor sales by month/year, to understand the income against a lower number of large builds.

Whatever your reason, if you don’t regularly measure the value you receive, you will soon lose sight of whether your business is charging correctly to make a profit.

The ‘How to’ bit:

Create a schedule of when and what to measure.  Give the responsibility to someone to ensure it gets done.  Produce the required reports and make sure the results are monitored, managed, understood and acted upon by the decision makers in the business.

If you would like help to set up the schedule and introduce your process, Contact Us

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‘How To’ Coaching series – Activity 36

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 36I know my average sale value

All you need to do to calculate the average sale price is to divide the total value by the number of products/services sold in a given time.

Sounds simple enough.

A question for you…

Do you want to know the average sale price before costs? Net of costs? Or the value overall?

Before we look at other factors, let’s take the usual measure of Number of sales over Net income for a given time.  For example:  if you sell 10000 items, and get a return of £50 each (after costs of production & overheads have been taken off) over 1 year, that would give a figure of £500000.

This would usually be calculated prior to EBIT (Earnings Before Interest & Tax).

There are other factors that impact ’value’.  Such as the LTV (long term value) a customer may bring over time.  Factors may include: You usually get a better take up of your offer when you market to your existing customers.  We will pick this up in a future blog on value verses price.

For this exercise, we’re focusing on understanding the return we get for a product or service.  When we know the average sale value, we can measure the effects of changes to price rises/reductions (both in terms of costs of production, or to us raising/discounting the price to the customers), changes in purchase quantities per order and other costs to the business.

The ‘How to’ bit:

The key is to choose what measure you are going to use and stick with it so that you have a level playing field on which to base your measures.

Typically, companies choose ‘total sales income per annum divided by sales invoices = average sales price’.  Depending on what you sell, you may want to go to a more granular level to understand the average sale price for each offering.

If you would like help to set up your process, Contact Us

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‘How To’ Coaching series – Activity 35

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 35 – Inventories are monitored to ensure turnover with minimal financial outlay

Stock control, maybe not everyone’s favourite subject. You may see it as a necessary evil, but this is where money can be saved or lost.

Introduce a process, system into your business to monitor the turnover of your stock levels.

It is just as important to ensure you are not carrying too little stock as carrying too much.

One horror story that saw the demise of a large aircraft manufacturer comes to mind, from many years ago.  The company produced military aircraft.  A senior buyer thought it was a good idea to purchase the ejector seats as production began on a batch of aircraft. The initial financial savings appeared considerable.

Suffice to say, that was a bit simplistic. The ejector seat contains explosive devices to blow the seat out of the cockpit should the pilot decide it’s time to leave.  These explosives are ‘lifed’. That means they can only be considered operational for a specific period of time. Also, there is an ongoing program of refurbishment and maintenance on the seats. As the aircraft would not be ready to have the ejector seats fitted for some time, the seats would require 3 or so services prior to use; and then they would be almost ready for replacement. All this without even making it into the aircraft, let alone flying.

This, and a few more significant purchasing errors brought the business down. It closed the business and made a large number of people redundant.

I’ve seen this in an SMe too. A ‘lifed’ product was purchased in a quantity that would last for 5 years, at the current supply rate. Only problem was that it went out of life in 2 years. To compound that issue, the supplier decided to sell directly to the public, at a rate cheaper than the SMe had purchased the product for in the first place. I suggested that client cut their losses and sell them at a reduced price that would see them off the shelves quickly. They decided to wait! In just over 2 years they threw away the lot! A loss of over £180000. Ouch!

The HowTo bit:

Build a stock management process and system, preferably automated. Introduce min/max and/or JIT (just in time) levels of supply. Ensure you monitor any ‘lifed’ items and also anything that might be ‘fashion’ driven. This way you will have invested the minimum of your operational cash into the business and have stock as and when it’s required.

If you would like to find out more details and would like some help introducing the process, Contact Us

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‘How To’ Coaching series – Activity 34

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 34 – I have more than 5 Strategies in place to increase my margins

If having a strategy to increase your margins is a good way of raising your net profit, just imagine what more than 5 will do.

It is useful to develop a schedule for the development and implementation of your margin strategies.

Rather than make huge changes in one go, consider bring them in over a sensible timescale. That way you will see which ones work, and which are the best. You will see how well (or not) the changes you make impact the bottom line.

I shared 5 ideas in the ‘HowTo’ post number 33.  Those are a good place to start.

What other areas can you think of that would make your margin better?

The ‘HowTo’ bit:

Here’s one to think about; develop a greater awareness of your brand, increase the perceived value of your products/service…. ‘reassuringly expensive’ for Stella Artois comes to mind. How about improving the design & packaging of your product, and then raising the prices.

Another way is to offer a selection of offerings. Something like, basic, standard or deluxe for your service. The work you provide will be basically the same, with some additional low/non cost features. That way the customer can choose. If the customer is influenced by the extra value offer, they will usually choose the middle or upper level.

Having wondered about how to price a service, the client decided to offer a selection of 3 levels of service. These were very similar in cost to provide.  They had different price points; and, you’ve guessed it, nearly every customer chose the best – it’s all about perception.

So, with this in mind, build a list of margin increasing actions to put in place and work out a schedule to implement them.

If you would like to learn more about this process and how to implement your margin increasing program, Contact Us

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‘How To’ Coaching series – Activity 33

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 33 – I know how to increase my margins

What do you do to get better margins on your sales?  That’s if you know what your margins are…  I see it so often; business owners don’t know what their actual margins are.  I’m sure you’re not one of those, are you?

Just in case you are, here is a safe place to find out what you could do.

First you need to know your margins. That was covered in ‘HowTo’ post number 31. Here, we talk about knowing how to increase those margins.

Depending on the industry you are operating in, there are typically different margins.  Margins in manufacturing tend to be lower than margins found in a professional service, such as a legal company.

For example, a small increase in margin for company producing many thousands of components can lead to a big increase in overall profits.  Whereas a bigger percentage increase for a business providing a service to a small number of customers would be required to gain the increase in overall profitability.

There are many areas in a business that may benefit from improvement, below are some basic ideas for starters.

The ‘How to’ bit:

Here are 5 ideas…

  1. Reduce waste.  A manufacturing client introducing an automated system for getting the most out of their materials could see a 1% increase on the bottom line.
  2. Reduce unprofitable customers.  A service industry, with a small number of clients, would do better to focus their resources on clients who are easier to work with.
  3. Limit discounting.  By introducing a schedule of discounting, a store would give less away arbitrarily.
  4. Focus on profitable products/services.  Consider stopping selling a product that gives little or no return.
  5. Review suppliers. Introduce an annual review of the terms and agreements.  It may be that a supplier has keener pricing if you are purchasing more than you were previously.

If you would like to find out more ideas on how to increase your margins, Contact Us

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