Doing the numbers
Charles Dickens certainly understood the principles of business. In David Copperfield he wrote Mr Micawber as saying,
“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
The headline turnover figure is unimportant. Although annual turnover of £1m might sound like an announcement from a successful SME, a little digging may reveal that the business is still operating at a loss. Some businesses are designed to do this in the early days because they recognise that, for their business to thrive, they need to invest heavily in marketing to raise awareness for profit later. Shrewd investors understand this and will support the business, up to a point.
Start Ups with little cash
The majority of start ups, however, don’t have external investors but follow a gradual process of development using their own funds. Because of this (and because it’s the boring bit) most forget to do the numbers properly.
While any sale or a new client can give you a great feeling of accomplishment, if the numbers are wrong your great feeling could evaporate once you realise how much your business is costing you to run.
Let’s take a look at a business start-up model that was very popular recently – the cup cake baker. I’ve chosen this for two reasons.
- It’s an easy model to understand and show where all of the costs are.
- I’ve spoken with a lady who was using this as a way of generating income while looking after her pre-school children.
Obvious costs are ingredients, paper cases, cooking time, delivery fuel and the cost of running an oven. Less obvious were the costs she had either missed or was unable to factor in, such as the costs of her own time making deliveries, running a food mixer, additional wear and tear on her equipment and car and, crucially, additional time, hot water and materials for cleaning up. The last was missed because, in her head, the cleaning wasn’t associated with the making.
At this point I’m going to introduce a word that will probably send some of you to sleep:
I wasn’t a fan of them for a long time, because they just looked like boxes with meaningless numbers in them. Then I met someone who could create spreadsheets that had real meaning. They did things that I didn’t know could be done and enabled me to see exactly how shifting a cost up or down, just a little, could have a huge impact on profitability.
At first I thought they were a bit too detailed, because they included things that I would never consider worth counting, such as paper clips, staples and elastic bands. But at the time we were using thousands of these things every month and so they had more impact than I would have imagined.
By changing stationery supplier for some items I found that, even with the additional delivery costs, I was able to reduce expenditure and increase profitability. It was only by a small amount, perhaps as little as £75 per month, but it was the beginning of looking more closely at costs and the prices my business was charging for its services.
That’s why this month’s bonus includes a workbook in both MS Excel and Open Document formats. There are instructions and guidance on what each sheet is for, what it should contain and how to enter the data. There are colour-coded areas for data to be entered and other colour-coded areas that you should not touch unless you’re an experienced spreadsheet user. We could have locked all of the function areas down, but it may help some people to see what’s going on.
Another thing that spreadsheets opened my eyes to was the true cost of taking on additional staff.
If you operate in warehousing or customer fulfilment your new staff member may cost wages, protective gloves and a tape gun. In an office environment you may need to consider desk, chair, computer, software licences and even a move to a larger office. These costs are obvious once you start to think about them, but the arrival of a new member of staff often coincides with a drop in production from your existing team because the ‘new guy/girl’ asks a lot of questions. That’s a cost that no one considers until they’ve been in business for a while.
The numbers are really important and should never be viewed as boring. If you’re in business to make money, the numbers are the most important thing.