Know your numbers!
I like to binge-watch Dragons’ Den, which may explain why so many contestants seem to make fools of themselves when it comes to the numbers associated with their businesses.
It really puzzles me when they look at the dragons with a gormless look on their face—they know they’re coming on the programme, and that they will be asked such questions. Questions that any investor would want to know before parting with their money.
Dragons’ Den aside, successful business owners are aware of their numbers all the time. It’s how they shape the growth of their companies. It’s not just about turnover, but (net) profit…as they say frequently in the Den, ‘Turnover is vanity, profit is sanity!’
For instance, say you had a mobile catering van that sold sandwiches and coffee. It may appear better for your revenue to sell sandwiches at £3 over a coffee at £2.75 (for the purpose of this post and comparing turnover vs. profit, we’ll assume customers only want a coffee or a sandwich—the best outcome in real life, of course, is to sell both to every individual).
The ingredients/packaging of the sandwich amounts to £1.25, whereas the coffee beans, coffee machine rental cost (per cup) and recyclable cup only amounts to £75p each time one is made. The gross profit in the sandwich, therefore, is £1.75, whereas the gross profit in the coffee is £2. There is also a utility cost with both products—the electricity to run the coffee machine as well as the fridge keeping the sandwich ingredients cold.
Factor in also the time spent making the sandwich versus the time spent pressing a button on the coffee machine and you will loosely arrive at your net profit for the two items. There are also wider considerations in this scenario: the sandwich ingredients may go to waste if not used within a certain time; though milk for the coffee also has a timeframe for use, it has a longer life span and will typically equal less wastage. The coffee beans will last quite a while, too.
In the long run, if this was your business, you would make more money from sales of your coffee. However, there’s another caveat…the demand/supply conundrum. How easy is it to sell to your respective audience(s)? If there was more demand for your coffee and sandwiches at a remote business centre than in a park that’s over the road from a McDonald’s, wouldn’t it make more sense to pitch up there, knowing the margins you’re working to?
This is a very simple business to derive numbers from. Most companies have so many more considerations, conditions and caveats to their numbers that it may take a qualified accountant to eke them out. That, however, should be one of the things you pay them for. It’s prudent to have a sit down with your financial professional on a regular basis to find out which of your products/services is selling the most and the costs involved with attracting and delivering each sale. Your easiest and most profitable sales should be your first concern.
As for business growth, the next number at issue is that of capacity. You may earn a decent income from your ‘sweet spot’—i.e. your 40 working hours each week filled with the delivery/provision of the product or service that’s the easiest to find/sell and which carries the highest net profit—but where do you go from there? You could buy another coffee/sandwich van and employ someone to run it, but if it’s not in another area completely, you risk being in competition with yourself. You could add more products to your range and upsell (though how many people, after they’ve bought a coffee AND a sandwich would want something else, too?), or you could diversify and start a completely different business completely.
Most businesses are more complicated than that of a mobile caterer, but the lesson is the same. If you only manage to attract sales on products that carry a low net profit (and find even this difficult), your priorities and your marketing messages are wrong. Rather than continuing to flog a dead horse, it’s easier to go back to the drawing board. Knowing your numbers is incredibly useful at any time, not just when you’re flying high on the wings of success; they can help you see when it’s time to change tack, too.
Contestants on Dragons’ Den clearly believe they’re onto a winner to go on the show in the first place. However, it doesn’t take long for the dragons to differentiate hype from true commercial and financial success, which is why they’re where they are.
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