As the leader of your business, you aim to make strategic decisions—improving the position of the business—as often as you possibly can. It’s easy to slide into the day-to-day operations and get caught there. You know the feeling: You shut your office door to work on the “big project” and shift very quickly to being interrupted by the “quick question” about costumes or the request about how to handle Ms. Dance Mom who has flown off the handle again. Then your day is gone and the “big project” remains unfinished … and sometimes untouched. You need to protect your visionary time with a vengeance so you can take your business to the next level and be the leader you want and need to be.
Let’s start that strategic journey by reflecting on the financial health of your business. Take a snapshot of the overall, broad financial view of the following financial information by calendar year (use your accounting software, such as QuickBooks, or ask your accountant to provide this information):
- Total Revenue Generated (Gross Revenue)
- Total Expenses (Costs of Goods Sold + Other Expenses)
- Total Net Profit (Gross Revenue – Total Expenses)
- Owner Compensation (inclusive of your salary and any distributions)
Step 1 - Revenue Analysis
First, pull the gross revenue for your business by calendar year (January 1st through December 31st) since the inception of your business or at least the last five years. It’s best to look at these numbers side-by-side as you can see in the example on the worksheet. It might not be obvious, but you are hoping to see a steady or upward trend in the total revenue. The concept is that as your business operations mature, you should see growth in each area of your programming, such as recreational enrollments, special offerings (teams, productions, shows), and ancillary products or services (private lessons, studio rentals, studio gear). If you see a flat line or a downward trend, you may want to investigate this in terms of your sales strength.
Here are a few key questions that might unveil answers about growth:
- Are you actively capturing potential leads to grow your recreational population?
- Do you consistently take care of your existing students and their families so they continue to re-enroll?
- Do you offer any specialty programming and do you price those programs appropriately?
- Have you thought about new and fun ancillary products and services to offer that will deepen your relationships with those who already buy from you?
Step 2 - Expense Analysis
Second, pull the total expenses for your business for the same time frames you used in step one. Once you have done this, calculate the total expenses as a percentage of total revenue. This is the metric you really want to be watching! Mike Michalowicz, author of Profit First, recommends that operating expenses be at the following levels for a healthy business (see fig. 1 above).
What you are hoping for here is to better understand and control your expenses so you don’t overspend when times are good and you benefit from scaling in your business otherwise. “Scaling” means growth and great scaling occurs when you sell more to generate more revenue while maintaining or reducing expenses. A simple example of this would be filling recreational classes with more students (for example, growing from five to ten students in a room) while paying one teacher’s hourly wage. This represents scaling. Once you pull these numbers for total expenses, here are a few questions to ask:
- Do you see scaling in your business with expenses maintained or reduced, while revenue increases?
- If not, are you seeing more expenses because of expansion (such as training or supplies) that will benefit your business?
- If expenses are over the percentages above, why is that? Where are you overspending?
Once you have asked yourself these questions, you may need to do an expense audit to see where you might need tighter control over your expenses. (In INSight™ Magazine: The Recovery Edition, you can find individual expense ratios to watch and compare to in the Fundamentals of Finance article.)
Step 3 - Profit Analysis
Next, you will want to calculate the difference between your total revenue and the total expenses to map out your total net profit for the same time frames. This is a number you may want to look at as a percentage of total revenue and the dollar value as well. Your total net profit is the fruit of your labor and effort each year. Here, you should aim for 15-20% as a healthy bottom line. Here are some questions to ask:
• Is the total net profit increasing year over year?
• Does your business fall within the healthy range of 15-20% (or more)?
• If not, are you working toward improvement by analyzing the results in Steps 1 and 2?
Step 4 - Owner Compensation Analysis
Last, but certainly not least, pull the compensation you have taken as the owner, for the same time frames. Your compensation should include all salary, bonuses, and distributions you’ve received (depending on your corporate structure, you may or may not have all three of these). Here, again, you are hoping for a steady or upward trend. Often small business owners put themselves last, but that should not be the case. You deserve a healthy, stable wage for the hard work and contribution you bring to your business. This is often overlooked because you are busy otherwise or too willing to sacrifice your earnings. As in Step 3, here are the ideal percentages—this time for owner compensation—as published in Profit First (see fig. 2 below).
Here are the questions to ask:
- Are you satisfied with what you receive in pay?
- If not, what is the pay you deserve for what you do in the business?
- How long are you willing to wait to get what you deserve and what do you need to do to get there?
This bird’s eye view of looking at your historical financial big picture can help you uncover the shortcomings in your business and take the actions needed to fix them. Make this reflection and analysis a priority so you can take the necessary steps towards a stronger, healthier business. Whether your business is brand new, a few years old, or you’ve been in business for decades, you will benefit by taking the time for this exercise. You have to slow down to speed up! What you learn from your numbers will help you focus your efforts in the right areas of your business so you can truly see the forest among the trees.