Key Learning Outcomes
- Recognise that the more knowledge you gain on the financial performance of your business, the more strategic your planning will be.
- Refer to your business’s goals to determine the type of financial information you require.
- Examine your business’s profitability and learn how to identify areas where you can increase revenue.
- Use the case study business to guide you when looking at the financial performance of your business beyond simply the profit and loss.
The Absolute Best business plan is focused on business improvement and should include a section that gives a snapshot of your current financial performance. This will give you a baseline to work from. Additionally, once you have completed this section you can review your goals to ensure you are not aiming too high or too low.
The factors that are covered in the financial section will vary depending on the type of business. For some businesses that do not hold stock and have limited expenses, this can be a reasonably easy task. However, others may need to enlist the help of a financial expert to get the complete picture. Here we outline some of the key areas you should look at when working through the business planning process.
First things first – are you making a profit? Your accountant will be able to assist you with this. However, in basic terms, if you are bringing in more income than you are expending, then the business will be in profit. Don’t forget that to be making a profit, the business needs to be in a position to compensate not just the staff but also you as the owner of the business. If you are not making a profit or it is not sufficient to sustain the business for the long term, there are two options: you need to either increase the revenue or reduce your expenditure, and sometimes it will be a combination of both. Ideally, you want to look at this on a monthly basis to see if there are seasonal trends as this allows you to plan and budget accordingly.[wlm_ismember]
For most of the businesses we work with, increasing income is one of the goals in the business plan. In order to increase income, you need to look at the current income and be able to break it down according to where it comes from and look for areas of improvement. The first time you do this exercise, you may find that you look at a lot of different aspects, for example revenue by product line or fees charged for services. It is important to focus on areas that are going to aid you in the pursuit of your goals. In business, when you are looking to increase revenue it will be through one of the following methods:
- Increase the number of customers you have.
- Increase the value of each transaction per customer.
- Increase the number of transactions per customer. Or,
- Raise your prices.
Look at your goals and determine what financial information is going to assist you. For example, if one of your goals is to increase your average sale per customer, you will need to know what the current average sale is, and look at areas of improvement. For example, a restaurant may have a current average spend of $34 per customer, but through research find that only 20% of customers order dessert. This information reveals an opportunity to increase the average spend per customer by selling dessert more proactively. Knowledge is power and the more that you know about your own business, the better you will be able to plan and succeed.
If we look at our case study business, The Best Beauty Salon, we can look at the revenue in several ways.
The salon offers several products or services. By looking at the income generated by each, we can see that facials bring in the greatest income followed by product sales. Body treatments, while identified as a point of difference for the salon, actually bring in the least amount of income at only 11% of the total.
This information on its own is not enough. The Best Beauty Salon also needs to look at the profit margin of each of the services. To calculate the margin you need to deduct the costs from the revenue. To calculate this as a percentage, the formula is:
((revenue – cost)/revenue) x 100 = % profit margin
While this sounds easy enough, it can be difficult to calculate accurately, depending on the business. You need to take into account not just the cost of the goods sold but also a percentage of all other costs in the business. Once again, you may need to enlist the help of your accountant or financial expert at least in the first instance.
For The Best Beauty Salon, it is much easier to calculate the cost of the retail products sold than treatments as the salon operates on a simple 100% mark-up system. So for example, they purchase a product for $50 total cost and sell it for $100 giving them a profit margin of 50%.
However, the products used vary from treatment to treatment along with the time taken up in the treatment room and staffing costs. To make the task simpler, The Best Beauty Salon divides the salon costs (rent and outgoings) by the four treatment rooms. By breaking down the salon costs by the number of available treatment hours each week, an hourly rate can be determined. There are 51 treatment hours per room available each week. If the total salon costs are divided by the four rooms and then by the 51 hours, the cost to operate the salon per hour, per room is calculated as $17.15.
However, the salon needs to consider that not all rooms are being used 100% of the time. By looking at the bookings for the past six months, the salon is able to calculate the following room usage percentages and therefore calculate a more accurate hourly rate for each room:
Treatment room 1 (waxing room) – 70%; therefore, $24.50 per hour
Treatment room 2 (facial room/anti-ageing) – 40%; therefore, $42.88 per hour
Treatment room 3 (facial/massage) – 50%; therefore, $34.30 per hour
Treatment room 4 (body treatment) – 20%; therefore, $85.75 per hour
Of the available 204 treatment hours, on average 90 are being filled each week. Based on this figure, staffing costs are calculated by dividing the total weekly staff cost by the current average of 90 hours. This equates to a current cost of $32 per hour.
Following this exercise, the salon has concluded that while body treatments are perceived as having a high profit margin and offer a point of difference for the salon, they are in reality providing the lowest profit margin. Having one treatment room solely dedicated to body treatments means that this treatment’s profit margin is lower than a low-cost treatment such as waxing, as shown below.
Room 1 (30 mins): $12.25
Staff (30 mins): $16.00
Profit margin: ((65 – 33.25)/65) x 100 = 48.8%
Room 4 (1.5 hours): $128.00
Staff (1.5 hours): $48.00
Profit margin: ((235 – 206)/235) x 100 = 12.3%
This analysis provides information for the business owner so they can make more informed decisions regarding the future direction of the business. While there is an opportunity to exploit a point of difference with the body treatments, the treatment room needs to be booked more consistently. A goal should be set specifically for this treatment, not in terms of the income, but in regards to increasing the profit margin through higher room occupancy.
This research allows us to look at the business’s capacity in more detail. By researching room occupancy and the number of available treatment hours, The Best Beauty Salon has identified that there are ample resources available to increase income through increasing the number of customers that are treated. If you do this exercise and find that you are in a similar situation, then you should set goals that relate to increasing the number of customers you have, and look for ways to increase the frequency that your customers buy from you. If you are in a situation where you are already at capacity, for example a restaurant may be filling the restaurant at every service, the only way to increase revenue is to either expand the number of seats in the restaurant, extend the opening hours (perhaps a pre-theatre or supper menu) or increase the average spend per customer.
As mentioned in other articles, we do not profess to be experts on the financial side of the business and urge you to seek professional advice in this regard. What we can do is highlight some basic business management principles that will assist you in running a successful business. Creating a budget is one of them.
A budget will allow you to check month-to-month if you are on track or off track and adjust expenditure accordingly. In small businesses, we see clients who only find this out when they go and see their accountant once a year. We encourage you to engage some help if you do not feel confident with this side of your business, or to carefully check your budget after you have completed it.
When compiling your budget, look at the income and expenses for the past 12 months. Go through each expense line by line to see if there is anything that you no longer need to spend money on. Remember that increasing profit often comes from decreasing your expenses, so it is essential to review your expenses on a regular basis. Look at any area where you know your expenses will increase. For example, if you are planning to promote into a new geographic area or to launch a new service, make sure you increase your marketing budget accordingly. Next, look at your income figures and adjust them to reflect your projections based on your business plan. Remember to look at seasonal activity and not to over inflate these figures so they are unrealistic.
If you look at the budget and find that you are not showing a profit, then you need to seriously look at whether you have set your targets too low, your expenses are too high or perhaps the business model is not sustainable. In all of these cases, we would suggest once again talking to your accountant to get some expert advice. We find without exception that the better a business owner is at budgeting, the better they are able to manage the business. These people tend to be more structured as to what they spend their money on, and are usually very focused on hitting their income targets.
This concludes the research section of the business plan. You should now be armed with some valuable information and insights to allow you to work on the final sections: the work plan (what we are going to do and how we will do it), the milestone schedule (when are we going to do it) and the critical risk analysis.[/wlm_ismember]
[wlm_nonmember]Would you like to see the whole article?
Would you like to start driving positive changes in your business? Would you like to see increased productivity and profitability? Of course you would!
As part of our commitment to being a low cost yet highly effective service to help owners and managers of small to medium sized business, we are now offering the first month of your membership for just $1! This means you will get full access to all of the learning articles, tools and tips that our website has to offer and with a commitment to upload at least another 150 learning articles through 2015 there is also plenty more learning on the way. On top of this you will also receive our weekly newsletter to keep you updated on new learning for the week and much, much more!
You can cancel at any time, however, if you see the value in what we’re offering (and we’re sure you will!) your membership will automatically continue after your trial at the low cost of just $19.95 per month. So what are you waiting for? For just $1 you are getting full access to all of our content for 30 days risk-free, so come on and join our community today![/wlm_nonmember]
Success is giving it your Absolute Best!