I have two problems when measuring against industry benchmarks:-

1/.        Are you really comparing apples with apples?

How many businesses make up the benchmark and just how comparable are they to each other and indeed to your own business?

Are they big & small, metropolitan &/or country based, new & old, running the same funding and operational structures and so on.

One can place faith in more common and the more identifiable businesses but otherwise, great care should be taken.  Data from well know franchises can reliably be compared against each other, but thereafter, beware.

2/.        I have found over the years that clients who focus on their industry benchmark fall for the trap of thinking that as they ahead or close to a benchmark, that all is OK.  Laziness and mediocrity tend to creep in (it reminds me of one of those great lines from Jim Collins seminal book Good to Great – good is the enemy of great).

More successful business owners however are more focused on improving any system and process in their business.  It’s amazing how often little changes have big results (see our blog from two weeks ago titled Greater profitability is closer than you may think).

So should you refer to industry benchmarks?  The answer is yes but a qualified one.  Just make sure you know what you are comparing yourself to and more importantly, place greater emphasis on improving the processes and systems within your own business.  In this regard, it is amazing how some businesses have come to dominate their industry by employing systems and processes from different industries.

The one benchmark though that you should not avoid is any applicable ATO’s small business industry benchmark.  Like many accountants, I question how they derive their numbers – for example, it is a blight upon my profession that many public accountants lazily declare cost of goods sold items within overheads so this must greatly distort the ATO’s gross profit margin numbers.  Questionable as these benchmarks are, they can’t be ignored as they are the ATO’s greatest business audit selection method and they target those businesses operating outside the ATO’s industry benchmarks.

I say this as many business owners don’t realise what can result from making little changes to the main drivers within their business.

What do you reckon would be the effect of improving the following by just 1%:-

• Increase price of $187 by 1%.
• Reduce cost of goods sold of $117 by 1%.
• Maintain overheads at $1,667,904 (they shouldn’t increase).
• Improve customer acquisition and defection rates by 1%.
• Increase transaction frequency by 1%

Would you believe by 52%!  Whilst not true for business with a low number of transactions of high value items, this is actually a common outcome.

Are you wondering what the possible outcomes are for your business? 

Why not ask us.

We use Principa’s Game Plan software which models this and performs many other calculations and analysis reports of your business.  So instead of continuing to working harder, let us help and guide you to working smarter.

As I said some weeks ago,

 What you can measure, you can manage …

                … and what you can manage, you can control …

                            … and what you can control gets done.

Last week I queried whether your plan will work and touched upon good and bad growth.

Increasing sales is not the answer to everything.  It is not uncommon to see a business solely concentrating on increasing sales fall part if they haven’t ensured the business has the right team and systems in place to support greater turnover.

Worse still, some businesses even fail as they run out of cash due to the increased revenue not being enough to fund greater expenses and the greater amount of money locked up in debtors and stock.

Consider this……

Take a business that doubles its sales from $1,000,000 to $2,000,000 and everything else doubles from:-

• Cost of goods sold from $700,000
• Overheads from $175,000
• Net profit from $75,000 (average tax rate remains at 40%)
• Debtors from $125,000
• Stock from $160,000
• Creditors from $75,000.

Sounds good?

Actually, it’s a disaster.

Why – because the working capital required has doubled from $210,000 to $420,000 whilst the doubling of profit after tax has only generated an extra $150,000 – of which $60,000 will go in tax.  What seems to be a new dawn will actually prove to be a nightmare.  The business owner in such a case might think they are going forward in the right direction but there is something coming awfully big and fast straight at them!

The problem here is that the owner has concentrated on sales and sales alone.  The outcome would be quite different if other key drives such as debtors, stock and creditors turnover were addressed (and for which we have many strategies from our many years of experience and supporting tools).

We are a member of the Principa accountants network (from which this example was generated).  Amongst many other valuable services, they provide us with cutting edge software that quickly models such scenarios – and does so in a way that you will readily understand.

Why not refer to our web page’s article on business improvement potential.  Or better yet, why not ring Alex Stewart and make a time to sit down and have an obligation free meeting to discuss how we can help your business.

So again I ask, will your plan work?

OK, so you have re-charged the batteries over the summer holidays, committed your goals to paper and formalised a plan. Now comes the next step – have you determined whether the plan will work?  Or are you just hoping and guessing? This is where most business owners’ plans fall over.  Too many plans fail to model possible outcomes from changing key drivers of the business.  All too often, the only goal is to increase sales with little or no regard given to anything else including such things as:-

• What extra costs will you incur?
• Will your expenses increase proportional to increased revenue or will some increase in steps?
• Do you have all the required skills or do you need to find (and train) others?
• Will you be able to deliver the same level of service and/or support?
• Will you have to cut prices to expand (and what will be the profit and cash flow effects thereof). Is this an area where owners get it wrong!
• Do you need to inject sufficient capital or do you need to borrow?
• Or do you even need a capital injection – can say debtors and stock turnovers be improved?

Each of these issues raise a number of questions as to how the business does and should operate.  I can raise dozens and dozens of say debtors collection strategies and considerations.  And there are also more issues than the simple 7 listed above. It is amazing how often owners expand their business only to be crunched or even fail to due to cash flow issues (even where profits have increased). We have tools that can model and show you the outcome of any decision you may wish to make to your business – and do so in a way that you will understand.  Why not escape the fog of uncertainty and let us help you to see and change your future.

So you have set your goals.

Once committed to paper, the next step is to set out the actions that will ensure these goals are reached.  Crucially, the actions must incorporate who is going to what, when and how.

Herein lies a great lesson – most business plans are way, way too long.  My experience has been that the best ones are often only a page long.  They are concise, clear, and assign accountability within set timeframes.  Critically, they are reviewed regularly; weekly at times but not more than monthly.

And remember:-

    What you can measure, you can manage …

                … and what you can manage, you can control …

                            … and what you can control gets done.

With a fresh mind and before business life gets back to normal, the start of a new year is the best time to re-set your goals and moreover, put in place the action steps that will get your business to where you want it to be.

It is no coincidence that our more successful clients have a clear and stated vision of what their business does.

With this in mind, perhaps the best thing you can do this week, whether it be for the first time or simply re-visiting them, is to commit to paper your firm’s mission statement and customer value proposition.  Having these critical statements in your head is not good enough as they will be unclear or even incapable of being understood by customers and employees alike.  More importantly, you will be surprised how your thoughts crystallise once you see them written in front of you.

It is critical to get these two foundation stones in place before you start to address other areas of your business operation.

Please keep following these weekly blogs for other key business tips.