In my last couple of articles I talked about using your numbers to help you manage and grow your business.
The following is real life example of how a client used this concept to help grow his business…
Several years ago I was engaged by this client. During my initial conversations with the business owner, he admitted to me that he really didn’t understand his financial statements, nor did he trust they were correct, largely because he didn’t understand them. He also admitted to me that he certainly did not use his numbers to help him manage his business. Really, how could he, if he didn’t understand what his numbers were telling him?
In looking at his numbers and more specifically his internally generated profit and loss statement, it was clear to me this information could provide little value for decision making.
The business, at the time, generated sales of approximately $1.5 million, to what turned out to be, different business segments or classes of customers.
After being engaged by the client, the first initiative that was undertaken was to do what I call a ‘horizontal analysis’ on his profit and loss accounts. Instead of the traditional vertical income statement I analyzed his profit and loss accounts and classified these accounts into the different segments within the business. We were then able to quantify the sales levels, both in sales $$$ and volume of jobs, gross margin $$$, gross margin %, average transaction value, average gross per job for each of the business segments.
This analysis showed us that each of these segments yielded very different results from each other. Further, we were able to identify that the activities to grow each segment were in fact quite different.
After doing this analysis, we applied the ‘4 Ways to Grow Your Business’ to each business segment and developed a profit improvement plan for the entire business.
Afterwards, we re-structured the company’s chart of accounts so we could accurately monitor the results of the profit improvement plan on a go-forward basis. This process and thinking has been continued year over year for the past 5 years.
The results of implementing these basic, yet most often over looked and underutilized concepts has been nothing short of outstanding. Over the past 4 years the business has grown 135% in sales and profit has soared to reach a maximum of 7.5% of sales.
See, I told you it was simple!