I Love This Time of Year!
January makes me hopeful. It is a time for reflection and renewed commitment to do better. I hope you have had some time in December to enjoy friends and family and maybe some good food.
As a small business owner, it is also a great time of year. I have always been a nerd when it comes to numbers and spreadsheets which means I’m in heaven when January comes around.
I have always thought of QuickBooks as the dashboard for my business. It tells me how much fuel I have, how fast I am going, and if the engine needs to be checked. But the year-end reports make sure I can make realistic projections for next year. Now I have realistic numbers to compare month-over-month and year-over-year performance.
You need to know where you have come from, and where you are now, so that you can accurately predict where you want to go, and if you can make it there safely.
Of course, you start with the basic Balance Sheet and Income Statement.
Here are some of the other reports I like:
- Client list in order of revenue
- Client list in order of profit
- EBTDA (earnings before interest, taxes, depreciation and amortization)
- Product Margin
- Services to Revenue ratio
- Cost of Sales to Revenue
- Net operating profit per FTE (if you have employees)
- Cost of Goods Sold (if you sell physical products)
No matter what size business you have it is important to track these things throughout the year. They are especially important to take a good long look at these reports at the beginning of a new year to create goals and set priorities for the new year.
The levels you achieve in some of these reports will vary depending upon your type of business and the size of your business. You should consult a CPA to determine the acceptable margins for these values for a business like yours.
Here are some ballpark targets I have used in my business over the years.
EBITDA should be at least 12%. If you are not making that you might consider selling your business. Put the proceeds into a mutual fund indexed to the NASDAQ exchange then go get a good job.
A negative EBITDA indicates that a business has fundamental problems with profitability and with cash flow. A positive EBITDA, on the other hand, does not necessarily mean that the business generates cash.
Product Margin. This value will vary greatly depending upon your type of business. In my business (technical) I expected 20%-30%. It is important to compare product margin over time. You could be selling more product but generating less gross profit from all that activity.
Cost of Sales to Revenue should be under 20%. If you are a small business, this may not be a difficult target to reach. However, as you grow and add salespeople they will put pressure on this number until they have learned your products and begin producing
Revenue per Full Time Equivalent. Again, this will vary greatly depending upon your business. My business was 65% service, 25% product and 10% subscription services. My target for Revenue/FTE was $10,000 or more per month while Profit per FTE being less than $2,500 per month.
This is a “red flag” value for any business and is an important indicator of the health of your company. You should calculate it monthly and graph it to see variations in both Revenue/FTE and Profit/FTE.
Perspective for Making Goals and Setting Priorities
By the middle of January, you should have all the figures entered for 2016, including credit cards, adjustments and other things that come up. The final reports are created and the books are put to bed.
Now I get to do the part I love. Reviewing the numbers is like watching a movie of the last year in fast motion. It is easy to see what part of the business is making the most profit and what part is holding us back. Which customers are profitable and which are not. Which services generate the most revenue and which services are taking time away from profit making activities.
Reviewing your “numbers” is absolutely NOT a choice. It is an essential part of knowing your business inside and out.
Wisdom says that you get better at whatever you pay attention to. So, calculate and pay attention to your numbers weekly or at least monthly. If you do, you are likely to be successful. If you watch your numbers quarterly, you are likely struggling and wondering what to do.
If you need help finding the numbers you need to track for your business, it is worth getting the assistance of a bookkeeping company or a CPA. It will be like driving with a well-lit dashboard and strong headlights compared to driving blindfolded.
Now, look hard at your reports. Look at the top line and bottom line and everything in between. What activities can you eliminate because they are not generating sufficient profit. What revenue sources are doing well.
Set goals for the coming year on a quarter-by-quarter basis. Set goals for increasing customers, for increasing revenue per customer. Create goals for efficiency. How can you serve more customers or sell more product without increasing costs.
Having goals is great. Write them down. Now prioritize them. List your goals as tasks and rank them by “Which goal will benefit your business the most”. Your goals in priority order will be your To-Do list. Look at your list every day. Work on your priority list until each task is done and each goal is addressed.
Have a great 2017!
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