Setting up multiple companies to separate business interests can seem very straight forward. There are however important considerations. We explore the implications of owning too many companies.
Beyond Sales: How to Drive Business Growth through Financial Insight
24 October 2024
Accounting & Compliance, Ambitious Startups, Building a Business, Cloud Accounting, Structuring a Business
When it comes to growing a business, most owners think of one thing—more sales.
“I have never worked a day in my life without selling. If I believe in something, I sell it, and I sell it hard.” – Esteé Lauder
In a previous blog Building a Saleable Business we discussed why growth is key to building a truly saleable business.
The fact is the bigger the business, the probability is that profits will grow and the business valuation will increase.
However sales on it’s own is not the prerequisite to success.
Sales growth anchored to increased profitability is the key driver to an increased business valuation.
So why doesn’t sales growth automatically lead to increased profitability?
Let’s look at an example
You win a new contract for £200,000 which you have carefully costed out and the direct costs should be £120,000 meaning a £80,000 extra profit!
You currently however do £500,000 turnover so overall you are expecting sales growth of 40%.
Sounds great right?
But here’s the catch you manage every job yourself and are already working flat out.
You think you have the capacity but the reality is you don’t.
The new job is not run well, problems arise, there are delays, poor work which needs to be corrected at your cost and you are stretched to breaking point.
But worse still it impacts on your existing work and you end up with the same problems- overruns, poor work and disgruntled clients.
Your £80K extra profit quickly disappears and that 40% sales growth has actually led to less profit!
What could be done differently?
So what could you have done to ensure that the growth leads to profitability.
We have discussed in detail the major elements to building a successful business.
Clearly sales and marketing are key to get the work.
This is the life blood of every business.
However without a great team it is virtually impossible to create a great business.
“Great things in business are never done by one person; they’re done by a team of people.”– Steve Jobs.
You need to ensure you have great people around you and build a great management team.
But in addition to this you need to ensure you have great systems and Processes in place– this should be throughout the whole business from stock control, purchasing, how the actual work is carried out, the finances (billing and collection), recruitment, health and safety etc… The list goes on and on.
But what about the numbers?
The focus on sales, marketing, people, systems, processes is essential however the simplest win and most often overlooked is the numbers- the financial insight.
Price increases
A business turns over £1m has a gross profit of £400K and a bottom line net profit of £100K.
Let’s say we increase the price by 10% and as a result lose 5% of customers.
What’s the impact to the bottom line?
£1m x 95% x 110%= £1.045m
Direct costs £600K x 95%= £570K
Overheads unchanged= £300K
Net profit= £175K
Turnover up 4.5% but Net profit increase of 75%!!!
Surprisingly relatively small price increases have a huge impact on profitability so regularly price increases are essential.
Yes there could be a loss of business but wouldn’t you rather work less hard for more money!
Monitoring financial performance & KPIs
Growth usually creates cashflow issues through the provision of credit to customers and increased direct costs needing to be paid out quicker than the monies are coming in.
Often this can be hidden via loans, an increased overdraft facility, factoring etc…
The first you know that you have a major problem could be 2 or 3 months down the road when cash runs out.
Preparing management accounts gives you advance warning of issues arising.
If you can go deeper and do job costings then even better.
Another key exercise is to monitor key performance indicators (KPIs) all of which we discussed in an earlier blog: Why Should I Review My Financial Figures?
The key is to monitor the numbers!
Budgeting & forecasting
“You know the business plan won’t survive its first encounters with reality. But the discipline of writing the plan forces you to think through some of the issues and to get sort of mentally comfortable in the space. Then you start to understand, if you push on this knob, this will move over here and so on. So, that’s the first step.” Jeff Bezos- the founder of Amazon.
Business planning- an exercise missed by most business owners is probably the most important in building a great business.
Every year you should carry out a strategy day or business planning day to look at the next year (or further) and to determine what steps you need to take to grow the business.
There inevitably will be additional costs.
A new operations manager, a new IT system, new equipment etc…
If you then build this into a budget you can determine what levels of turnover you need to hit to reach your desired level of profitability.
You could of course do it as you go along but if you intentionally plan and think of all eventualities then the likelihood of success is greater.
If you do a budget then why not take this a step further and do a cash flow forecast.
You can identify cash pinch points and plan accordingly- a new loan, increased overdraft facility, increased sales targets, cost cutting etc…
Three simple financial exercises- regularly increase prices, prepare good timely management information (including job costing and monitoring KPis) and budgeting will ensure that the pursuit of turnover results in profitability and real growth.
Getting in touch
If you’re interested in exploring these opportunities, consider booking a discovery meeting with one of the team.
Through a value gap analysis, we’ll review your current position and help set the path for where you want to be.
We also offer regular strategy sessions to build the team and insights you need to take your business to the next level.
Our Services
If you would like to find out more about some of our services that might help you please take a look at our related pages:
Blogs
Take a look at our other blogs on the topic of Financial Insight:
5 Invoicing Tops to get paid faster by your customers
Why Managing Cashflow is more Essential than ever
The content in this blog is correct as at 16th October 2024. See terms and conditions.
