Changing Course
The 1st three series of videos “Business made simple” outlined the basics of understanding your business and how to treat costs to assure a profit. Within those videos we created simple ratios (rules if you will) to generate a successful pricing formula.
However, you may be thinking “I understand the formulas, but my business is more complicated – how do I begin without screwing everything up?” Before we go any further, I am going to assume your company is over one year old; if not, check out the videos on launching your business properly.
Moving on, 1st review the last six months and quantify the three major categories Gross Earnings, COGS and G&A. Make sure you earmark an appropriate salary for yourself and add it to G&A. Now subtract COGS & G&A from the gross. Is there money left over? If so, you’re profitable; does it equal 10% of the gross? I’m assuming the answer is – No – let’s go further.
Over the years I have launched multiple businesses including manufacturing, distribution, and specialty contracting. Also, at USIF we analyze new clients daily. Therefore, our sample size is extensive; and we have witnessed benchmark ratios that dictate success. The following are four general ratios that will produce profits.
COGS and G&A cannot exceed Gross x 90%.
Typically, COGS should not exceed Gross x 75% if you are using subcontractors for services provided.
Typically, if you are self-contained i.e. your w-2 employees provide the service or make the product. However, starting at 40% as material makes up a greater proportion of invoices, COGS can inch towards 75%.
G&A should not exceed 20% of Gross Earnings – 15% to 18% is a good target.
Ok – use these four benchmarks to get you started.
This one is obvious – we are looking for a 10% profit minimum.
You coordinate and oversee others to provide a service. That means your business model should have a lean overhead burden – you have little need for brick & mortar space, employee health insurance, an HR department – however you need a laser focus on AP & AR. G&A should not exceed 15%.
With this profile you might be a manufacturer, or a specialty contractor. Regardless, you are providing the product “in house”. If so, you must be competitive – that means you provide the product for less than you can purchase it. Why? – for one your G&A is going to be higher.
A 20% G&A should cover any established business. If yours is more, you need to scrutinize it.
Most likely your company will be similar to numbers 2 or 3. Once you determine where your company fits, you can compare expense ratios. And accordingly, you can quickly determine where you need to make changes.
Changing course is not easy. It requires that you seriously analyze your operations and determine which changes are doable. We work with clients all the time helping them adjust – if you would like our opinion, give us a call.
And remember, if business is going well but cash is tight – we can help.
Check out the corresponding video for this blog post on Youtube, here!