As the end of the financial year approaches, my conversations with business owners have focussed on recovering costs in your business…boring but important. The last thing you want to spend time on thinking about is cost recovery models; as Melbourne Business Coach, my clients are saying to me ….I love doing the work or I love selling and dealing with people but the accounting stuff does my head in.
But it is important to understand which parts of your business are making money and contributing to your lifestyle, otherwise you will be funding everybody elses’ lifestyle! And this particularly is true where you have more than one product or service and where you have a choice as to where to spend your energies, where you invest money in promotions, marketing and developing expertise, so it seems sensible to me for you to know if your efforts are worthwhile.
Perhaps you have a team of two or three people in your business or maybe ten, who solely focus on 1 product or 1 service. And maybe you haven’t given much thought to what they really do during each work day, or how productive they are, or how many clients they are servicing, but you know your sales tick along ok regardless. But “ticking along” doesn’t really sound like a business strategy to me?
As business owners we should be focussing on the activities that make us the best profit or the best margin. But if you are not thinking about cost recovery, then my challenge is to ask you are you really managing your resources to optimise your business.
So what are some simple steps that we can action so we can progress our thoughts about the best way to optimise your business.
I always believe the best place to start is to define the outcomes, the benefits of why I should spend some time thinking about this. And why it is important to know what your cost recovery model is, because once you do, then the following questions arise;
1 Am I charging my customer the right amount (compared to my costs), and will the market allow me to charge more
2 Do I need to change how I quote and how I educate the buyer on the “value equation”
3 Am I providing too much (or too little) service to my customers for the price I advertised/quoted
4 Does my customer need to understand the work that has gone into building my expertise, or the development of the product
5 Are my staff doing what they should be doing and are they focussing their efforts in the right areas
6 Are my staff producing the output required for me to make a profit, or are they distracted on tasks that are not relevant to the business
From doing this analysis, we are going to gain some powerful information that will help us make more informed decisions. We are going to then layer the facts over our emotions, so we can set some meaningful goals into the future as to what business levers we need to tweak or change.
The accountant in me would want to show you how to calculate an overhead recovery model but then, there are many variables and such an assessment would oversimplify any benefit to you. But I would like to share one assumption that many business owners get wrong. It’s the available working hours of staff.
Assuming a full time worker, then we have 52 weeks in a year, less 4 weeks annual leave, less 2 weeks public holidays, less 2 weeks sick leave….leaves us 44 working weeks at best. So we have pay our staff at 100% of weeks, but can only recover their costs over 85% of available weeks.
Then we need to know the range of productive hours – how many hours of output charged to clients/allocated to a product/service. In any given day, there may be staff meetings, training sessions, coffee/smoke breaks, replying to non productive emails, talking to people on the phone, being interrupted, surfing the net/checking out social media, leaving to visit a client late in the day (knocking off early)…. there are lots of ways that staff leak productive hours.
So let’s say lower level staff are productive for 90% of the time and higher level staff at 65% of the time due to management functions. Using lower level staff as the example, we know have 44 weeks x 90% productive = 40 available weeks in which we can recover our costs.
Next is to allocate our fixed costs or overheads. In its simplest form, these are all the costs that don’t get directly allocated to a product/service (cost of goods sold). These fixed costs need to include your owners wage/drawings, well at least to what a commercial salary would be for your time. By including your own salary, you are locking in cost recovery number for you to get out of bed and be rewarded for your efforts, before “profit” comes into the equation.
Most business owners then go “yikes” when they determine the costs that need to be recovered per hour. But what this process does is get you to ask you the questions; the questions that strategically need to be made to build a better business. And that’s what I do as Melbourne Business Coach, I mentor and challenge business owners to put six figures and beyond into your business so you can positively impact the lives of your family, your staff and the community. If you would like some help in building a better business, then drop me an email.