Review Your Business for a great 2014 (Question 4)
You’ll be beginning to ask, how long do these annual business reviews take? And the answer is not long at all if you have the systems in place, but more importantly the time spent will be well rewarded.
So onto week 5 of our annual business review series and we look at operating costs and productivity and the four key metrics/standards which will ensure that you maintain a healthy cashflow
Monthly profit and loss
Wage to Sales
Those who know us also know we love a good template but benchmarking your productivity to industry standards or comparing your own performance by accumulating your statistics over time will enable you to grow your business not only through increased sales but also through improved operating productivity.
Monthly profit or loss: Profit is not simply the difference between the costs of the product or service and the price being charged for it. The calculation must include the fixed and variable costs of operation that are paid regularly each month no matter what. These include items such as rent or mortgage payments, utilities, insurance, promotions, taxes and wages, even the salary you may not be taking yet. By recording actual expenses against budget you are able to stay firmly in control of your business success.
Overhead costs: Overhead costs are fixed costs that are not dependent on the level of goods or services produced by the business, such as salaries or rents being paid per month. In any growing business, these can creep up and become out of control if not tracked carefully.
By tracking them on a monthly basis, you will be able to see more clearly where spending occurs in your business. Use this information when updating your business plan or when preparing yearly budgets. Because overhead costs are not influenced by how much your business earns or grows, you need to track them separately and diligently. We provide our clients with financial templates which has overhead costs separately monitored for this area.
Variable costs: By definition, variable costs are expenses that change in proportion to the activity of a business. Fixed costs and variable costs make up the two components of total cost. These include the "cost of goods sold" and other items that increase with each sale, such as the cost of materials, labour, shipping and other expenses directly connected to producing and delivering your goods or services. The value of tracking these as a metric is to assure that they are decreasing as your volume is growing, and assure that they are consistent with industry norms and competitive offerings. If your variable costs go up, your business won’t grow, even if sales are up and customer numbers increase.
Wage to Sales Ratio: Labour is likely to be your most important and most expensive input, especially in sales, manufacturing and support operations. The one constant in small business is change, so the excuse of “we have always done it that way” is not one that a growing company should ever want to hear or use. Retail ideally should operate at a 12% wage to sales ratio, but NZ averages approximately 18%. By using a rostering tool based on traffic into store you will not only ensure you are optimising sales but also that you are operating efficiently. We have an easy to use rostering tool which enables you to monitor your wage spend, plus will enable to optimise your customer experience.
Operational productivity isn't about cost out, it’s about optimising your expenses to provide opportunity for growth. Only by tracking and being acutely aware of your operational expenses will you be able to achieve financial success.