Why hold back on business growth?
We often have a great gut instinct, but we’re surrounded by noise – lots of noise. That makes it very hard as an owner to actually see what’s really happening in your business.
What does holding back on business growth look like?
We took on a client whose impression was that they shouldn’t grow their business. They thought that if sales went up, profits wouldn’t.
They were at a point where they were actually earning less than they would if they were employed.
They were in a contracting-type business, and couldn’t see how growth would be worth it.
- They had quite a high profile role, so they could have got a decent job
- Their relationship with their husband was affected
- They were working longer hours than they should have been
- The accounts weren’t showing good profits.
They came to us for help and to understand if it was viable to push sales, or if they should just sell up and take a job?
What was the solution?
The client wanted to stay in business but they felt they hadn’t reached where they wanted to be. So, we undertook a full review of the business and delved into the numbers.
They were on Xero, but it wasn’t set up as well as it should have been, especially with the major cost, wages, included in direct costs.
We split the wages and travel time into direct costs which go above the gross profit line, and overheads, which go below.
We showed that the gross profit percentage was actually much higher than that given by their previous accountant. The end (net profit) was still the same of course, so we delved further to look at how we improve that result.
We:
- identified that they could take on more work without taking on more overhead
- suggested more efficient routes so that staff were not spending a lot of time travelling
- discussed whether or not staff could spend more (chargeable) time on site
- looked at how they could increase prices within their contract terms.
We carried out a full review around their contracts, pricing and how much money they were earning (and where from).
Having made those changes, what impact did that have on business growth?
Although change can be instant, it’s also a matter of mindset. You can’t always implement everything at once, so we came up with five or six points. We started with the easiest wins with least time to implement.
Initially there was a bit of pushback, but within a couple years sales had increased and profits had increased as well.
The gross margin had increased to more than 50%, and sales had gone up by nearly 50% without increasing overhead by more than 10%.
How did the client feel?
The client was very much more in control of the business! They were earning more and felt comfortable that they could take some breaks. They were not under pressure from their husband to take a job and they were adding value to their business value.
Profits increased dramatically, meaning money available to invest in the business and allowing them to take a decent dividend. We also made some tweaks on Xero so that they could trust what was on the dashboard and feel in control when they were away on holiday.
What changes do we recommend you make to maximise business growth?
- Understand your numbers – if you don’t, find someone who can help you to understand them so that you can drive your business.
- Analyse your costs correctly into direct costs and overhead costs.
- Understand your margin – you need to know your gross margins in each part of the business so that you can grow a business that has sustainable profits, rather than a business that’s struggling.
- Understand where you’re making money and where you’re not – you can do this by breaking your sales (and corresponding direct costs) into 3-5 chunks so that you understand exactly where you’re making money.
- Consider your resources e.g. overheads, staff – maximise what you’ve got. Are staff doing unnecessary activities? Cut back and you’ll save yourself and them to use that time more effectively.
Business success is often making simple little changes that sometimes you know in your gut, sometimes you don’t. Having the right information, however, helps you to make those right decisions with full confidence.
If any of this is resonates with you, get in touch and we’ll set up a time to talk. Alternatively, you can book a Business & Xero Review for a fixed low fee.
