I had the chance to talk with one of my fellow PBCA members (Professional Business Coaches Alliance) the other day who is also a CPA.  I always find it interesting to get his perspective because I (like a lot of people) sometimes get overwhelmed with financial jargon.

Unlike some CPAs, John does a great job of keeping things simple.  A big part of the discussion we had was on the importance of Cash Flow relative to the health of a business.

Discussions on Income Statements and Balance sheets are often where an accountant will take you - and those are very important things to keep up to date and accurate, but they won’t always tell the whole story and they’re often more complicated due to accounting standards and can be difficult to plan with.

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It’s a very natural thing to wonder how you stack up to those around you.  I remember back as far as grade school trying to figure out who was the fastest kid in my class (not me – but for short enough distances I was close…), or was the best at math (might have been me) or the best baseball player (definitely not me – especially after my career ended in 3rd grade with a particularly bad foul tip to the face…).

In the business world, that desire to know how you stack up is still there but beyond being just a competitive thing, there are a lot of tangible business reasons why it’s important to know how you stack up and where you are.

Are your financial metrics above or below your industry average?

What if you were running 15% higher on expenses compared to other similar sized companies in your field?  Maybe it’s on purpose – your unique difference is premium customer service and your willing to pay a premium (and receive a premium price) to stand out from the crowd.

However what if you don’t know why your expenses are above average?  A bit of investigation, some consultative help (perhaps from your favorite business development firm…?) and maybe you could lower your expenses – which goes straight to the bottom line!

As long as we’re talking about financial metrics – are you looking at the right financial ratios to get a real read on the health of your business?

If you were thinking about growing your business and asking for a loan to get you there, do you know if you’re in good shape to get that money?

This is difficult stuff, but depending on your situation it can obviously be very important.

*Note – blatant advertising to follow… 

My firm – Aspire Business Development, in conjunction with the Professional Business Coaches Alliance (PBCA) has just completed an agreement with Fintel and it’s a really exciting development.

 From their website:

Fintel brings you an array of products to help you understand, and improve the financial performance of any firm regardless of size.

• Fintel database includes over 900,000 private and public companies in over 900 separate industries
• Powerful and unique benchmarking reports comparing your company financial information to an entire industry or only similar sized firms
• Easy to use interactive reports for evaluating and improving profitability and cash liquidity
• Comprehensive tools for helping to understand and improve sustainable growth rate (SGR)
• Comprehensive tools for helping to understand and develop the value of your business
• Loan risk evaluation module specifically designed for the lending industry, but available to all firms with debt financing
• With Fintel Industry Metrics quickly obtain industry financial ratios to compare to your company
• On-line access, secure data, minimal input, and highly useable management reports

Whether you are looking for industry financial ratios, tools to help understand and improve sustainable growth rate (SGR) or assistance with debt financing, you can rely on Fintel to give current and accurate financial performance reviews.

The bottom line is that there is a cost effective way for you as a business owner to know how you stack up to others in a detailed but easy to use analysis.  Couple that information with a business development consultation that will help you take action with your new knowledge and you’re on your way to a competitive edge!!!

You can also use that same baseline of information as a planning tool to run what-if scenarios that will show you what your cash flows could be pending certain activities, help you rationalize strategic plans and investments (i.e. should I spend the money on a system that will reduce my average inventory hold time?) or help you determine the overall value of your company.

I’m excited about using Fintel learning more about all the things they can do and especially excited to start using it with clients.  If you’re interested in learning more, contact me and let me know what you think.

So where do you stand within your industry?  What information would you really like to have that you haven’t been able to get so far?  Share your thoughts here.

Shawn Kinkade  www.aspirekc.com

How much money do you need?

As a new business owner, a big part of my ongoing experience and planning center around money.  Admittedly money isn’t the reason I got into this (I’ll save that for another topic…) but it’s always going to be a factor.

However, and I think this applies to everybody, money definitely plays a large part in determining the amount of success my business will have.  Which brings us back to the starting point:

How much money do you need?  How much money do you want?

Now there’s a philosophical aspect to this question that ties into living within your means and that kind of stuff,  but right now I’m thinking of the more tactical and practical viewpoint of how to use break even analysis to drive all sorts of strategic planning.

Note – this is an extremely basic set of calculations.  Those of you that have done some accounting will likely find this not very interesting, but I bet you do some variation of this in your head or on a napkin somewhere when you’re thinking about your business.

Simplistically, a break even analysis is a way of calculating how much of my product or service I need to sell to cover all of my fixed and variable costs.

Although there’s potentially a lot of details and difficulties in getting to this information, the break even calculation is simply your fixed costs divided by your Gross Profit margin (as a percentage).  *Note – Gross Profit margin is your gross income (Total sales – Variable Costs/cost of sales) over your total Sales.  Here’s a quick example.

Assume you sell $100 of widgets (it’s gotta be widgets…!) and it costs you $70 for every widget you make (variable cost).  That gives you a gross income of $30 which means you have a Gross Profit Margin of 30% or $0.30 on every dollar is profit (before you factor in fixed costs).

So back to the break even analysis.

Fixed Costs                          _____________ (A)

Your Gross Profit Margin    _____________ (B)

Break even Sales (A/B)

If we use the example above and assume our fixed costs are $100, our break even sales would be $100/.30 = $333.33 meaning that we would need to sell $333.33 dollars worth of goods just to break even. 

Anything under that is a loss…!

Anything over that is profit…!

Now that’s an interesting piece of information to know – but what’s even more interesting is to use this process to figure out what you would need to sell in order to reach your desired income/profit.

So let’s say as a small business owner you would like to make $100,000 for the year (before taxes and assume that all net profits would flow to you as the owner).

Let’s also assume that your Gross Profit Margin on your widgets is 30% (same as the example above).  Finally, let’s assume that your fixed costs are $50,000 for office space, equipment costs, whatever it is that you are spending whether you make any widgets or not.

The sales you would need to meet your desired income goals is simply your Desired Income plus your Fixed costs / Gross Profit Margin.  Here it is with the numbers from our example:

($100,000 + $50,000)/.3 = $500,000

In other words, given this scenario, Sales of $500,000 would net you as the owner, $100,000 in profit.

Now that’s a pretty cool thing to know.  If you want to make $200,000…   ($200,000 + $50,000)/.3 = $833,333 in Sales.

More importantly this gives you an easy and simplistic (quick) model you can use to think about your business in different ways.

What do I mean?  Maybe you think $500,000 in sales is a bit optimistic this year – what else could you do to tweak your process and still hit your target of $100,000 in profit?

You could make changes to your Gross Margin (reduce your variable costs or increase your price).  Going back to the $100,000 in desired profit, a Gross Profit Margin of 40% instead of 30% means you would only need to sell $375,000 instead of $500,000 ($150,000/.4).  (Note – that would be the equivalent of a 16.7% price increase using the example at the top of the page.)

Alternatively you could reduce your fixed costs.  Fixed costs of $25,000 instead of $50,000 would lower your required sales to $416,667 instead of $500,000 ($125,000/.3).

Obviously this is too high level to use for accurate and precise planning, but it does give you a quick and easy way to visualize and brainstorm what you need to do to get the money you need.

In a future post, I’ll break down you can use this information as a basis for calculating the number of sales leads you need to be tracking down every week to hit your desired income.

If you’re interested, I can send you a simple spreadsheet that lets you play around with these numbers (note -very simple).  Just drop me an email via the Contact Page with a note about this topic.

As a business owner, do you know what your break even point is?

How often do you step back and think about what you’d like to make…and what it would take in real terms in order for that to happen?

I’d love to hear your thoughts on this.

Shawn Kinkade www.aspirekc.com