By Bill Prosch
In previous Cleanfax articles, we’ve spent a lot of time discussing the role that planning plays in effectively running a small business. Planning is so important that it’s almost always listed as the first of the five functions of management.
This isn’t new stuff. Everyone who’s ever taken a basic class in business management is probably familiar with it. In fact, Henri Fayol is credited with developing the five functions all the way back in 1916. These functions are still recognized as the cornerstone of management activity today. They are most often defined as: Planning, staffing, organizing, coordinating, and controlling — even though Fayol’s original list included commanding, not staffing.
Today, I don’t want to talk about planning. We did that starting last October, November, December, and, for the procrastinators, January (and beyond).
Now that we’ve passed the halfway point of the year, it’s time to employ the fifth management function: Control. We need to control back to our plan. That means we need to take stock of where we are versus where we planned to be.
Revenue and profit
Back in the fourth quarter of last year, we should have determined objectives for our companies: Revenue, staffing, spending, and profit objectives. Now, past the halfway point of the year, we need to examine how we’ve done in achieving those objectives.
The most obvious objective to measure is revenue: We set a goal for sales; how have we done so far? Did we meet our sales objectives, exceed them, or fall short?
If we exceeded our objectives, how did we do that? This would be great information to know, and, even better, it would be great if we could duplicate it in the second half of the year.
If we fell short of expected sales, we also need to understand why, and we need to know that now. Why is it critical to know now instead of at the end of the year? Perhaps there’s something we can do to get back on target. We still have time to adjust our plan. There’s no point in sticking with a flawed plan, so let’s fix it — or abandon the flawed parts and correct the course we’re on.
The next key indicator to look at is our cost of goods sold (COGS). In other words, what did it cost to earn the revenue brought into the company? How does that compare to our plan?
Again, we must ask, were we able to produce our work at the gross profit level we anticipated, or was our cost too high? If so, why?
Having spent a few years as a student of Tony Robbins, I love to use his quotes. One thing you constantly hear Tony say is, “If you don’t like the answer, ask a better question.” If our COGS is too high, we need to know why. So, we need to ask a better question. Once we know the “why,” we can work on the fix that just might salvage our profitability for the remainder of the year.
After we’ve thoroughly dug through our sales and COGS numbers, it’s time to look at our company’s overhead, or total expense line. Since these are typically “fixed expenses,” total expense is directly affected by our volume of sales. As our sales volume goes up, total expense remains fixed, effectively making it a lower percentage of sales.
Sales too low? Then typically, our total expense will be too high. On the other hand, if our sales are on target, or above, and our total expense is still too high, it’s time to start examining just where we overspent.
Sometimes, there are simply unavoidable expenses that occur during the year, but these are usually one-time hits. We still have time to even out our expenses over the remainder of the year. If, instead, we simply spent more than we planned, now is the time to make corrections and get our spending back under control.
At the very bottom of the profit and loss statement is the “net profit” line, the line we all want to be as large as possible. If we’ve paid attention to our sales, COGS, and total expense, then net profit will take care of itself. If that number isn’t as large as we planned, we need to go back and examine our sales, COGS, and total expense.
The answer is always in the numbers. Remember, if we’re not getting the answer we want, we need to ask a better question.
Bill Prosch, CR, is a Business Development Adviser for Violand Management Associates (VMA), a highly-respected consulting company in the restoration and cleaning industries. Prosch is a leading expert in operations and a Certified Restorer. He has a deep understanding of entrepreneurial challenges having owned and operated a successful restoration company for more than 30 years. Through Violand, he works with companies to develop their people and their profits. To reach him, visit violand.com or call (800)360-3513.