Mastery in a business is exactly what it says – mastering the basics so you can move from an uncontrolled to a controlled state. But it doesn’t require a degree! It is about knowing and doing the basic things that will have an impact.
There are several areas of mastery and we will cover these over future articles. Here our guest contributor Gavin Bellamy of ActionCOACH will focus on Financial Mastery; and it involves both mastery of money and having the right mindset for the job.
When anyone starts a business they have an idea of what they want it to be, and to provide, for them in the future. At least they should have!
It’s a brave thing to do to start and to grow a business, but we all should do so with the intention of knowing what it look like when it is finished. “Start with the end in Mind”.
And in terms of business mindset ask yourself where/who you are – Business growth – Find 1 customer, then 10, then 20 etc. Or perhaps you are looking to build a business you can scale up; find yourself 1 customer, then 10, then 100. How do I turn 100 into 1000?
They offer different challenges and provide different opportunities. However they both require us to master our numbers and be clear of our role as the business owner.
Here is the clue to the most critical aspects of getting you to the finish line and really knowing you have arrived?
Money Mastery. Money isn’t the only set of numbers we need to master but probably the most important. If business is a game, what’s the scoreboard? Yes, your financial statements. The question is, if you can’t read the scoreboard, how do you know the scores… if you don’t know the score, how can you tell who’s winning and losing?
It’s the same with your business. How can you lead your employees well if you can’t read your own numbers? How is your decision making affected?
The key to Money Mastery is Budgeting & Reporting. All too often I hear comments from business owners that they don’t budget and they rarely look at their Financial Reports. At very least, you need to be looking at your financial numbers every month, no matter the size of your business.
The importance of looking at (and understanding) your numbers on a monthly basis is that if you identify a trend that is going in the wrong direction you can investigate and take alternative measures to turn the situation around. If you are only looking at your financial numbers at the end of the financial year when the accountant finalises your year end financial report for the Tax Office, it may be too late to take action in averting a financial disaster in your business.
The key areas of Financial Mastery that you must know or implement into your business include:
- Establish your Break–Even point
- Gross and Profit Margins
- Financial Reports including Profit & Loss, Balance Sheet, Cash Flow and Budget
- Establish Financial Key Performance Indicators (KPI’s)
Many people know how to calculate and monitor the gross margin, but the real power comes from using this to work out and monitor your break even margin.
The break-even calculation for sales is:
(Operating Expenses)/Gross Profit Margin = Break-Even Sales
Let’s use an example of a company with sales of £1 million and a gross profit of £250,000, resulting in a gross profit margin of 25 percent.
In Year 2, sales were £1.5 million and gross profits were £450,000, resulting in a gross profit margin of 30 percent ((£450,000/£1.5 million).
Now let’s use calculate their break-even sales figure:
Break-Even Sales for Year 1:
Operating Expenses of £200,000, Gross Profit Margin of 25 percent (.25) = £800,000 break-even sales figure
Break-Even Sales for Year 2:
(Operating Expenses of £275,000)/ Gross Profit Margin of 30 percent (.30) = £916,667 break-even sales figure
Once we know the sales amount, then with the average unit sale price we can work out how many units need to be sold.
If the company for example sold one product at £4000 the we know in year 1 that break-even point is 200 units. In year 2 it would be 229 units. Although margins have improved in year 2 the operating expenses have increased also. However, the better margins mean that the new break even point has gone up less in percentage terms than the operating costs.
The business then can consider whether this is feasible, or whether other factors need to change such as increasing (or decreasing) the price of the unit or a reduction in operating costs etc.
As a general principle however, identifying and establishing the Key Performance Indicators (KPIs) that are important to your business/industry will enable you to have a complete understanding of your business status at a glance, particularly when you have a clear understanding of what your key numbers should be.
It is worth remembering that our numbers result from activities that we do; activities happen because of decisions that management makes.
So if you’re not getting the numbers you want, review your activities and the decisions behind those activities. And if you’re not happy with that, review your management. That’s why coaching starts with the owner / management; because this is the beginning of the cause.
All our programmes have a “try before you buy” option. If you are unsure what coaching is or how it works then please book an informal chat with me via our website.
Gavin Bellamy, Business Coach