Simple numbers for success

Many small business owners are so close to their own glass that they struggle to truly understand and interpret the critical numbers that drive revenue, profitability and cash flow in their business. There are two overarching ways to improve profitability in any business:

  1. Reduce costs
  2. Increase revenue


I prefer to focus more on increasing revenue. As long as cash flow can support it, there is no limit to which you can grow top line revenue. But to do so, you must get a handle on the key drivers. I call them simple numbers for success.

Revenue drivers

When I was an accountant working in public practice, the firm I worked for would position itself as an expert in business advisory, often crafting marketing messages around the fact that we had a process to grow any business. Naturally we were often asked: How do you do that? My favourite response was along the following lines:

“In our experience, you can increase revenue and profitability in most businesses by increasing one or more of the following: the number of customers, the number of times they buy and the amount they hand over each time they buy.”

They are the first three of my simple numbers for success. You need to know for your business:

  1. How many customers do I have?
  2. How many times a year do they buy from me?
  3. What is my average transaction value?

I have found that once you know where you stand right now, it is reasonably easy to increase one or more of those numbers. If it’s more customers you need, focus on lead generation and sales conversion activities. Or, perhaps the real problem is you are losing too many customers, in which case look at your customer support processes. Similarly, you might identify that your average transaction value is, say, $561. Set a target of $600 and implement strategies to move it there (and beyond), such as increasing your prices on non-price sensitive lines, or introducing internal systems to upsell or cross sell additional products during the sale.

Profitability drivers

There are three key things to look at here. Firstly, your gross profit percentage. It is a critically important number for success. Put simply, if you buy something for $60 and on-sell it to your customers for $100, you make a gross profit of $40 for each product that you sell. That equates to a 40 percent gross profit percentage, and it is the contribution towards your general business overheads. Things to consider are:

  1. Is my gross profit percentage increasing or decreasing?
  2. Do I have any product or service lines that are actually unprofitable?
  3. How do I stack up alongside industry benchmarks?

Next, look at your breakeven point. Analyse how many units you have to sell before you break even (meaning, cover all of your fixed and variable costs). Anything above that number is profitable.

Then, take a good look at your costs and view them as investments. Your role here is to ensure that you are getting the very best return on investment for every single expense in your business. Most businesses can cut out 5-10% without negatively impacting operations, marketing or customer service. Of course, those savings will drop straight to your bottom line.

Cash flow drivers

If you wonder why your profit is sometimes very different from the cash you have in your bank account, I suggest you ask your accountant to prepare a diagram to show you the difference. For example, you may have pulled out excess dividends or drawings that are shown BELOW your taxable income line. Or perhaps your customers are paying you more slowly than they previously have, meaning you are making sales and raising invoices, but not collecting the cash. The two most common cash flow drivers in small business (other than high profitability) are days in receivables, or the length of time on average it takes a customer to pay you, and days in inventory, a measure of how much stock, inventory or WIP you are holding. Both of these measures indicate cash locked up.

To give you an example of how the numbers work, if you are a $1M business with days in receivables of 60 (meaning on average, customers take two months to pay you), if you could reduce that to 50 days, you would free up almost $25,000 in cash flow during the year. For many small business owners, that is well worth doing and would take a lot of pressure off.

To summarise:

Simple numbers for success 

Revenue drivers

Profitability drivers

Cash flow drivers

  • Number of customers
  • Transaction frequency
  • Average transaction value

 

  • Gross profit percentage
  • Breakeven point
  • Costs – are you getting the best return on investment?

 

  • High profitability
  • Days in receivables
  • Days in inventory

 

Next time you see your accountant, take this table along with you and get a plan together to measure where you are now, set some targets to achieve and determine the strategies to get from A to B.