Four Steps to Better Profits
Few solo consultants and small firms reach the above average profits they are capable of. Most do not have the basic information at their fingertips to do so. I want to highlight four steps that you can take to greatly improve your profits and cash flow.
1. Have good financial statements
You can’t fix something until you know what is happening now. Surprisingly, many small business managers have no idea how their business is going. Good financial statements are the starting point to measure the results of the business as a whole.
To make any management decisions to improve financial performance, you need financial statements that are:
- Accurate: All relevant business transactions should be processed and checks done to ensure everything is included and in the right place. Misleading information can do more harm than no information.
- Timely: It is no use looking at how you did 18 months ago. To make meaninful changes you need to know the results of your recent efforts. Monthly, or at least quarterly, accounts will keep you on the pulse of your business.
- Relevant: Well designed accounts provide a simple, clear picture of your business’s results. Unstructured and poorly thought-out accounts will confuse you. Make sure you have accounts that show the information you need, and nothing else.
2. Have a financial plan
You need financial statements to show how you’re doing. But with nothing to compare them to, it is hard to know whether the results are good or bad. When you compare your results to a plan, or budget, you can see where you are succeeding and where you are not.
The financial planning process serves two key purposes:
- First, the planning process reveals the feasibility of what you are trying to achieve. Often people create a elaborate business plan with ambitious plans. When it comes to crunching the numbers, they realise it just isn’t going to work. Don’t start on a business without knowing the numbers make sense.
- Second, the plan is the yardstick to measure your actual results against. Only by doing this can you see where things are working out and where they are not. Then you know where to focus your energies to put things right.
Without a plan you are working and hoping for the best. With a plan, you are following a thought out route with a much higher chance of reaching your destination. By regularly comparing your actual results to your plan, you will quickly see what is working and what is not.
3. Analyse results by segment
Your financial statements will show your overall business results. To identify exactly where these results can be improved, you need to know which part of your business is working and which isn’t.
A good accounting system will help you separate your results to show profit by any type of segmentation. This may be by client, service type, region if you have clients in more than one area, or by staff member if you employ other fee earners. By examining different segments, you will undoubtedly find that some areas of your business are subsidising others and the results may surprise you. It often feels like the business that is keeping you busy is making you money, but the results can reveal a different story. Armed with this knowledge, you can either fix the under-performers or put more resources into the over-performers.
David Maister wrote in his book Managing the Professional Services Firm, that it is not unusual for firms to find that 120% of their profits come from 80% of their clients. In other words, they are losing money on 20% of their clients. Those 20% are draining energy that should be used on your good clients. But until you know who they are, you can’t fix it.
4. Monitor key performance measures
You can’t track all your results all the time, but you can closely monitor two or three key indicators. When you know what you’re trying to achieve, you can identify the most important areas for you to achieve it. By closely monitoring these, you will have rapid feedback to learn and improve your performance.
The measures may change as your business evolves, and they can relate to any area of your business. The popular Balanced Scorecard approach is to divide your business into four areas and choose the objectives within those that will make the biggest difference to your results. This helps ensure you are looking at your business as a whole:
Learning and innovation
What professional and personal development will increase your ability to deliver value to your clients, profitably? How do you measure your development in this area?
How can you improve your efficiency through increased skills, technology or systems? The smoother your business runs the more time you have to deliver your services.
How will you generate new work from new or existing clients, and how do you measure your success? You might track the number of new enquiries, the percentage of those that become clients (conversion rate), or the number of higher value services provided.
Where is the biggest potential to improve your financial performance? It could be increased fees, better profit margins, or improved debtor collection and cash management.
Every business will identify their own critical success factors, but they should be based on the cause and effect relationship.
Do you have gaps in the above areas? If so, by getting on top of your management information you could stop your profit leaking out.
It doesn’t need to be complicated or expensive to put these four measures in place. If you want some help, get in touch.