Do you know what you want from your business? I expect so – it will be the reason you went into business in the first place. Whether it be to make your millions or make enough to be comfortable and be able to spend time with your family.
But are you getting what you wanted? Did you want to spend more time with your family and yet find you work all hours? Did you want to retire to a yacht in the Caribbean in five years but are scraping a living?
If the answer is yes it’s likely because you’re spending all your time dealing with what’s happening right now – that piece of work that’s due by the end of the day, or the complaining customer, or taking that call from an angry supplier who wants paying yesterday. You’re probably so busy firefighting that you have no time to think about how you’re going to achieve those ambitions you had when you first set up.
The answer is a plan.
Let’s say you want to build your business to a size where you can make a (very) comfortable living but have a management team who run the day to day of the business. Let’s say, to keep the numbers simple, you want to make £100k a year but you only need to be there half the time. Do you know what your business will have to look like for that to happen? What level of turnover do you need? How many customers/sales does that equate to? What staff costs are you going to incur to get the business in this shape? If you’re still reading this I imagine you’re saying you don’t really know.
But, actually you probably do. You just haven’t asked yourselves the right questions. Answer these and you can them work out where you need to be. And when you know where you want to go, you can work out the strategy to get there. Your plan.
It’s really a simple case of working backwards. You want to be left with £100k. So first you add back your fixed costs – rent, rates, heat and light, etc. Let’s say that’s £20k. So you need to make £120k. Well if you know your gross margin is, say, 50% you need £240k turnover to make £120k profit. Take off the overhead and bingo, £100k earnings.
But that probably ignores the costs of the managers who will run the business for you. Call it £100k for arguments sake. So now you need margin of £220k (£100k managers, £20k fixed costs, £100k for you). So that equates to £440k turnover.
Is that it? Usually probably not because as your turnover grows you’ll incur additional costs (more staff, warehousing, larger premises, etc, etc). The thing is, if I said to you that the simple calculation above was the answer, you’d likely reply – yeah, but if I need three managers I must need 30 staff, where’s the costs for them, or the extra desks I’d need to buy, and PCs, and how am I supposed to grow my turnover to nearly £500k with no marketing costs? So you just proved you know the answers, so factor them in.
How you implement the plan is another matter. But by breaking down your overall ambition into a more detailed plan it’s a whole lot easier to make good decisions that will get you there.
And finally, there’s not a lot of point spending a couple of days on your plan and then filing it in a shiny folder in your desk. You need to measure what you’re actually doing against the plan. With the right financial and management information you can measure how you’re doing against the plan. With really good information you can forecast forward and have a pretty good idea if your going to achieve your plan, and so if your business is going to give you what you want from it.
And isn’t that what it’s all about?