I was at a business event and got talking to Matt. “How’s business?”, I asked.
Matt replied with, “I’ve just had my best month ever”. Matt runs a growing commercial truck repair business in Melbourne.
“Revenue or Profit?”, I questioned. Matt looked at me blankly for a moment before responding… “Revenue actually”.
Have you ever heard the saying, ‘revenue for vanity, profit for sanity’? This means while revenue may make a company look successful, it’s profit that really matters for financial health.
Matt’s response was classic ‘revenue for vanity’ thinking. You see Matt’s focus is all about generating higher and higher revenues. His goal is to keep ‘expanding’ his business. To get traction on his goals he has now tripled his marketing spend, hired two additional mechanics and continues to pursue all growth opportunities. In fact, now he is looking to buy a new motor vehicle to offer as a loan vehicle to his customers.
A highlight of Matt’s month was reviewing his sales figures. He immersed himself in the details of his sales revenue growth story. He was chuffed to see his efforts gain traction.
However, behind the razzle-dazzle, Matt’s business faced constant cashflow issues. When he worked out his September quarter superannuation, he was surprised it was so much. But it was logical – he had two new staff after all. When the superannuation payment was coughed up, it noticeably impacted the bank. Bank cash levels were low.
When the September BAS arrived for signature, Matt felt like his business was a cashflow punching bag. The $72,000 for the BAS was more than expected. But it was logical – two new staff meant two more lots of Pay-As-You-Go withheld from wages. But how was he going to pay it?
Don’t be Matt. Adopt a ‘profit for sanity’ approach and keep your company financially stable so you can meet your cash commitments with ease. This means you need to manage your expenses, overheads and commitments carefully to understand them. This will allow you to optimise operations and make strategic decisions to ensure healthy profit margins are maintained.
Know Your Numbers. Regularly review your financial reports against your business budget. Check your cost of sales. Check your gross profit margin. Check your payment commitments. Are business overheads matching the initial budget? If not, where did you over-spend or under-spend, and why? Understanding the answers to these questions is imperative in optimising financial performance.
It is your business. Take accountability. Then you can understand whether your labour charge-out rates, materials mark-up rates, pricing methods, payment terms and margins stack up to deliver reward for effort – aka profit.
Ultimately, your business’s ability to grow relies on positive cash flow.
A three-way forecast helps businesses predict their financial future, ensuring they can pay suppliers, employees and lenders. A three-way forecast is a financial model that links your profit & loss, balance sheet and cash flow projections to accurately forecast your future cash position and financial health. A three-way forecast prepared to professional standards, alongside quality Xero bookkeeping, will offer your business precise and reliable forecasts, delivering comprehensive insights into your future financial position.
