Sell and deliver

We start off as technicians.

But pretty soon most business owners need to become good at selling. Being good at making your product or delivering your service isn't enough. You need to attract new customers and sell to them.

It's sometimes difficult to separate the selling from the doing. Whilst closing the deal a business owner might also be worrying about how they are going to deliver it. That's not a good thing if your anxiety is visible to the potential customer. They want total confidence that you have the capability to deliver. They are not too bothered about the 'How?'

There is a quote from Richard Branson which always sticks with me, 'If somebody offers you an amazing opportunity but you are not sure you can do it, say yes – then learn how to do it later'.

That's fine and is good sense if you have resources at your disposal to deliver on your promises after making the sale. For a smaller business, that can be a challenge. The smarter business owners will have some back up. Some additional resources they can call on at peak times to get a job done. They can also get stuck in themselves.

But every now and then, despite their best efforts they may not quite have the capacity to take on a new sale and meet the customer's expectations. However painful, the best policy then may be to say, 'No'.

That's incredibly difficult. To turn away business and an opportunity that may not come around again quickly.

I've seen the consequences of overtrading several times - where businesses take on more than they can manage. It can be catastrophic and even terminal.

So I think Richard's adage of 'Go for it' is right but tread carefully and make sure you can deliver on your promises.

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What's the point in a 'Break-even' point.

Accountants learn about the  'Break-even' point whilst studying for their professional exams. 

Many though will rarely, if ever use it during their working life.

I think it's a useful and under-utilised tool however, particularly for start ups and early-stage businesses but also to established businesses who struggle with achieving consistent profitability

So what is it?

Well, essentially it is the level of sales or sales units needed in a period to cover fixed overheads and break even.

It is traditionally used in a manufacturing environment where the number of units which need to be sold to reach break-even is a critical measure.

It can be applied however to any environment where the cost components of gross margin are relatively uniform and directly related to sales volumes.

Let's look at a restaurant business as an example:

• The  main 'direct' costs are drink and food ingredients (wet and dry stock) and the labour needed to prepare the food, greet customers, serve the food and drink etc
• Let's say the labour costs are 30% of sales value and stock is 20% of sales value. So the gross margin is 50%.
• Fixed overheads rent & rates, insurance, premises costs, directors' and admin wages etc are £20,000 per month.
• So in this example 'break-even' sales are £40,000 per month. They generate a gross margin at 50% giving £20,000 'quantum' margin which covers the overhead.

So what?

Well getting to break-even should be be the driving force for the business. Every fibre of management's focus and effort should be to getting there and then forging above it.

The main levers are price - is there scope to increase these and still deliver good value and maintain ( or only slightly reduce) volumes, and cost control - ensuring buying stock is effective and payroll and staffing schedules are well managed.

If £40,000 sales per month are needed management should be asking, how are we doing on a weekly basis, or every day? What do we need to change?

The break-even point can be a powerful motivator for change. Once reached, the sales above this threshold are all profit. In our example, every £1,000 sales above the break even puts £500 on the bottom line. That's the happy place where  all businesses should aim to be. The business then has surplus profit for investment or additional return to the shareholders.

So some of the things we accountants learned in school - like discounted cashflow, internal rates of return and correlation coefficients may not see the light of day that much after our studies.

Break-even analysis though is something that I believe should get regular use in every business accountant's tool box.

www.base52.co.uk

What kind of small business is yours?

Every small business is different.

It's shaped by the founder or founders' values and the experiences and learning picked up on its journey. So putting small businesses into categories is not easy. It can be helpful though in gaining an understanding of the owner's motives and goals. For professionals like accountants, that helps us to give the right advice and support.

My consultancy colleague, Stewart Peart and I have recognised three main types of small business. All mainly shaped by the owners and what drives them.

The three types of business are Lifestyle, Owner-Managed and Entrepreneurial.

A Lifestyle business does what it says on the tin. It is built around the owner's lifestyle. There is no great ambition of being the biggest or best. It's primarily about working sensible hours fitting around family and leisure, the owner delivering the service and probably no other employees in the business. Examples might be a self employed plumber, hairdresser, accountant working from home etc. The typical business structure might be a sole trader. The owner effectively 'is' the business.

An Owner-Managed business is perhaps a bit bigger in scale. The owner will still be closely involved and 'hands on' with running the business but their role will involve managing as well as doing. Typically there will be employees and the business structure might be a limited company. Examples might be a small retail outlet, a small manufacturing unit or a high street accountancy practice with a single branch

An Entrepreneurial business is something else. This is where the founder or founders are obsessive about growth and scaling up. They are prepared to take significant risks to reach their goals and put the business above everything else. It is not for the faint-hearted or risk-averse. Typical Entrepreneurial businesses will be multi-outlet or nationwide in coverage or international. The structure might be a limited company but probably with a more complex share structure to accommodate investors. Raising capital may be critical to achieving scale in a short timescale

Where does your business fit within these categories?

We've put together a short series of videos which expand on these business types and how to make them work

I hope you find them useful

Watch 'business types' video

https://www.base52.co.uk/services/consultancy