The main indicators of success for your business are ‘work’ and ‘finance’.
Work is a straightforward measure of how much work you have on at any time. How many orders have you completed? How many are there in the book that haven’t been started yet and how many are in progress? A regular view of the value of orders in the book and the value of work finished each month will provide a trend.
Finance is measured in many ways. For the small business, it can be simply ‘what’s in the bank?’ and ‘how high is the overdraft?’ As with the work, however, a regular review for trends is extremely valuable. For both, a trend upwards is a good sign that business is good and getting better. Downwards is almost always not good.
The most obvious measure that everyone watches is simply ‘how much money is in the bank?’ A credit balance is good; an overdraft can be a challenge. The balance will be the difference between money paid out and money taken in. If you have more money going out than is coming in, you will not be in business for long. The trick is to identify it early and find out what’s going wrong.
If you have a lot of orders coming through and being completed but are still not making money, first confirm that the invoicing and receipt processes are running smoothly. No one will pay if you don’t ask them for it!
Next, review what you are charging for your product against what you have to spend to make it. Be sure to include your overheads in the cost calculations. If it costs you £20 per month for the telephone services and during that month you can produce 100 of your product, then the cost calculation for each item must include 20 pence to cover the telephone overhead. Similarly electricity, premises rent and rates, insurances, any employees (and your time), and any other charge that you pay, will all have to be covered by what you charge people for your product. The basic calculation is simply to divide the annual cost by the number of items you can produce in a year. The price at which the item is sold must include the complete cost for producing it. A small extra amount added into the price on top of the cost is your ‘profit’. Too much and people won’t buy. Not enough and you won’t be making enough to stay in business.
If it is costing you more to make than you are charging for it, then you have two avenues: put up the price you charge and/or cut down the costs for making the product.
I’m Charging Right but Still Not Making Money
If the charge for your product already covers the item production and you are selling and invoicing successfully but still not making money, then you may be building up a stock of materials or parts. This is easily done if your practice is to order slightly more than you think you will need, but never go back and use the extra that is sitting in the stock cupboard. If you have built up a high stock, you need to consider how to reduce it and maintain it at a more appropriate level. There may be quite a lot of money sitting in that cupboard that could be working better for you. You also require a system for using up what’s in the stock cupboard. Perhaps you order less. Better still, you may include a current stock check into your routine when pricing a job and ordering materials.
Making the Most of Trends – a Case Study
The other process for useful information is comparison. Comparison of this month with the same month last year will show whether things are getting better or worse but will also provide clues to what might be causing the trend.
In the following case study, Martin started his hairdressing business in January 2010 and in mid-2011 is analysing his receipts for the first 14 months he has been in business. He can see some important trends:
At the beginning of 2010, receipts were very low. This was the beginning of business and people did not know him or his work. He didn’t have much advertising working for him and his main custom came from family and friends and a few people who transferred with him from his previous salon. It is common for new businesses to struggle for a couple of years while they get known and build up a clientele.
There is a steady growth from the beginning as the figures show an upward trend, although June, July and August seemed low and January 2011 showed a big drop from the months on each side. In comparison, November and December 2010 jumped upwards very satisfactorily.
When Martin compares the two Januaries they both show low takings so it may be that the starting low figure was affected by more than just being a new business. It may be that January will generally always be slow. He will need to take that into account when planning for future years. It’s not a good idea to just charge a little more to cover the drop in work as it will alienate customers who have become used to the charges and expect them to stay the same. Changing charges requires advance notice and extra publicity. It is better to identify why the sales are down and encourage more people to come in. If he offers a ‘post-Christmas discount’ he may be able to attract more customers in during that month.
In contrast, his sales immediately pre-Christmas have jumped upwards. He reviews who came in during those months by checking his appointments book, remembering he was run off his feet, and finds that his older female customers flocked in to ‘have their hair done for Christmas’, while the young children and teens were less in evidence. The customer mix, and the type of hairdressing that was required by them, would account for the increase in sales. He can continue to expect a pre- Christmas boom if he maintains satisfaction for these customers and can keep them coming back.
During summer his sales fell slightly. His appointment book reveals more white space than usual, showing that he had times when no one was in the salon. He remembered hearing a lot of holiday stories in the following months and realised that many of his regulars had been away and missed having their hair done with him.
In reviewing his expenses, Martin found high expenditure in December compared with the other months. His invoice file showed that he had ordered in extra quantities of shampoos, conditioners, waxes and hairsprays. He remembered that with all the extra business, he had run out of some products and had been forced to shop around for emergency supplies. This had been more expensive than his usual suppliers, on top of being extra orders. He made a note to stock up more in October so to be ready for the rush this year.
Overall, Martin was able to conclude that the business was generally good, although there was still plenty of room for more growth. He would introduce a post-Christmas discount to see if he could entice more people through the door in January. During the summer period he probably would still have a drop in business, but he might be able to run a promotion for new customers. He could also try attracting his regulars – and perhaps others – with a ‘look good for the holidays’ promotion just before they go away. He would order in extra stocks of his consumable items ready for the pre-Christmas rush. If he doesn’t sell as much as he expects, he could use the leftover extras for his post-Christmas promotion and sell them at a discount.
In this case study, Martin is identifying, and dealing with, seasonal trends that will affect his profitability. By looking at the year as a whole, and comparing the months between years, he can see where his ups-and-downs relate to the time of year and plan accordingly. Seasonal trend is only one factor among many that make a difference to your sales. Depending on what you are selling, you may need to deal with fashions, new technologies, an event in the celebrity world, the impact of a new television program or film, a new law or regulation, an unusual weather pattern, a faulty product that lets you down, major job losses in your area limiting people’s spending, or something new that has never happened before.
The most successful businesses keep an eye on what’s happening, analyze why sales are dropping or increasing, drill down into the documents that are part of the daily process (such as appointment books and invoices), and find answers that they can then use to continue reducing expenses and increasing sales. It’s not difficult to do, but if you need help – or just another point of view – your accountant is a useful resource in analysing the figures. It will need your valuable knowledge of the daily business, however, to understand the underlying reasons and what might be done to address a potential problem.
It is up to you, as the business owner and manager, to keep an eye on the numbers, to measure progress regularly, and to address trends that are affecting your sales.