Many years ago a friend who became a business mentor asked me a question that literally stumped me. He asked me how much it cost to open my doors every day. I had no idea. Ironically I am the one who now asks this question of my clients all the time and I am constantly amazed at how little people know about their business. If I ask this question in a room with a hundred people in it, I am lucky if five people put their hand up to say they know.
We all need to know about every aspect of our business. I am not saying that we should become micro-managers, but we need to know certain basics. The profit and loss of a business is not something that we want to learn about months down the line. After all, what if you don't have enough money to cover the loss?
Whether we are making a profit or a loss is something we need to know today. Using a very simple formula, I add up the net cost of products and services, the fixed costs like rent and wages, and all other expenses and come up with the daily sales target that is needed to cover these costs and make a profit. For example, if it cost $1000 a day to run a business, and we sold products with a 50 percent mark-up, we would have to sell $3000 worth of products each day to break even. But who wants to just break even? Surely the objective is to make a profit? Ideally we would want to make at least double our cost for the day, so we would have to sell $6000 worth of products or services.
Imagine this equation if we were not selling anything. Our cost just to open the doors would still be $1000 per day, so if we sold nothing in a week, we would be $5000 down the hole. I think every business, big or small, needs to know whether or not it has made money or lost money that day. I know of enormous businesses, operating in thirty countries, that get daily figures that are just more complicated versions of my simple formula--without doubt they know if they have made or lost money that day.
We also have to know what is normal for our business: for example, what products sell and what don't; what changes in customer patterns and trends and increases in costs are to be expected. If unexpected changes or increases in cost occur, we need to find out why. So much money slips between the cracks in a business that it is ridiculous.
I once ran a reasonably large marketing company. My receptionist ordered all our printing and stationery supplies. We were moving office and came across this huge stockpile of printer cartridges that would have cost about $10, 000. I couldn't believe it. The receptionist had since left and I had to cop it on the chin but I found out from the supplier that she had made these big purchases to get the gifts that came with buying larger quantities. How much had this cost me? But I learned some very valuable lessons from the experience.
I now watch out for any anomalies in the bills. Things like phone bills going up unexpectedly, an increase in stationery spending, or even an increase in petty cash spending always activate my Sherlock Holmes genes. But how can you recognize anomalies if you don't know what is normal?
I now always make a point of signing every invoice that comes into the business. I want to know exactly what we are buying and how it is being used. I don't want to sound like one of those pedantic people who get uptight about someone taking a pencil. I don't actually care, but if they take it, I like to know. I am actually a very easygoing boss, but over the years I have realized that the difference between paying attention and not paying attention can be tens of thousands of dollars a year. And let's be honest--surely that money is better off in your pocket rather than being tied up in a ten-year supply of printer cartridges.
Any business owner who knows their business inside and out, and I mean all parts of the business not just the parts that they are most interested in, is way out in front of the competition. The sad reality is that very few businesses have even the slightest idea about any part of their business other than selling the products and services that they specialize in and ultimately this is what stops them from being successful.