Who Needs More Sales?

More sales? Who needs more sales? I bet you think you do.

Everyone knows times are tough - especially small business owners. We're all scrambling to succeed.

Here's something everyone doesn't know: More sales may not be what you need to survive Come with me as we take a trip down a typical income statement to see what I mean. Here's last year's income statement for the fictional Joe's Computer Repair:

• Sales $950,000 100%
• Cost of Sales $522,500 55%
• Gross Profit $427,500 45%
• Compensation costs $190,000 20%
• Other overhead costs $256,500 27%
• Total overhead costs $446,500 47%
• Profit (Loss) ($ 19,000) -2%

Let's assume that sales are down 10% from the prior year.

You can see that Joe lost $19,000 last year, and like most small business owners his first instinct is to regain lost revenues. Not a bad goal, but if that is Joe's singular focus, he may be missing opportunities and leaving money on the table.

While doing what he can to restore the sales, why not also look elsewhere for financial improvements? Let's start with Cost of Sales.

Most of the cost of sales is direct labor expenses, but some comes from the parts used. If Joe can reduce cost of sales by just $9,500 - by getting his repair team to be more efficient and working out a better deal on parts costs - Gross Profit goes up by that same amount.

Now to compensation. Joe has 11 full timers. With sales of $950,000, that comes to about $86,000/employee. Sales/FTE varies by industry, but in general, anything much below $100,000 is cause for a closer look. With the dip in sales, Joe may have to reduce hours or even headcount. Getting down to 10 FTEs would put him at $95,000/FTE - a significant improvement. This is an important measure that deserves attention. For this example, we'll
leave Joe's compensation costs alone as there are enough real layoffs without me piling on fictional ones.

Regarding overhead costs, can the team brainstorm on ways to cut costs and reduce overhead spending by just $12,000? If so, here is the new income statement, reflecting the improvements:

• Sales $950,000 100%
• Cost of Sales $513,000 54%
• Gross Profit $437,500 46%
• Compensation costs $190,000 20%
• Other overhead costs $244,500 26%
• Total overhead costs $434,500 46%
• Profit (Loss) $ 3,000 +0.3%

At just better than breakeven, it's a start and beats the heck out of a loss. All with the same sales. To get that same bottom line result solely by growing sales, Joe would have had to increase revenue by almost $50,000 at 45% gross profit!

So, what can you take away from this admittedly simplistic example?

• You and your people should look for improvements in every nook and cranny of
your P&L
• Small percentage changes can make all the difference at the bottom lin
• If you don't know your numbers, you can't manage them

Now, go sell something!

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