Every business faces a period when revenue drops below expectations for a time. Hopefully this occurs at the beginning of your ownership journey, not the end. It’s at this time that knowing your numbers will provide comfort and reasons for optimism, or indicate that you are sailing far too close to the rocks! Either way, knowing your numbers, listening to what they are saying and taking action should see you back in calmer waters.
Sounds soooo simple but… it isn’t. “Overcorrection” means that you’ve seen the danger, you’ve reacted and taken action. Too much action. And now you’re facing danger again. If you’ve ever been skydiving and the safe landing zone is quite small, you’ll understand what we’re talking about, particularly the consequences of overcorrection.
I want to be correct without overcorrecting
Correct! And to ensure that you don’t go too far with say, budget cuts or frenzied reinvestment plans we use a humble(ish) $100 note. Your business $100 note. Let’s start with a few easy ones. Of every $100 that flows into your business, how much is assigned to:
- Paying the tax man
- Your pocket in the form of your pay
- Profit, which is the jewel in the crown of your business
If you don’t have the numbers to hand, your business might just be costing you an arm and a leg because too often owners take a pay cut when they don’t need to and shouldn’t. Unfortunately, ignorance is not an excuse when it means that you’ll be bringing less money home to the family or spending more time away from them. Okay, lecture’s over, let’s look at a typical example.
We find that a lot of businesses split their $100 notes like this:
- Profit – $0.30
- Owners pay – $11.00
- Tax – $15.00 (and this really does depend on your structure and the advice you receive)
- Operational expenses – $73.70 which in some cases can’t be helped but surely it’s worth a closer look.
Replacing the numbers above with the numbers that are specific to your business is an important step towards reducing the correct costs. Isn’t it strange that we’re in business for ourselves, hoping to provide for our families and when push comes to shove we blindly start hacking away at costs (including profit and our own share) without seeing the full picture. That has got to stop.
Look closely once again, at your $100 note and its break up. When push comes to shove, perhaps it’s the tax component, the company car use and premium delivery services that come under the spotlight for a month or two.
Your pay, your profit and your time should remain sacred. Take note.