02 Oct Biz is Growing! Positive Change Part 1
I have a new client today! What an exciting statement for the small business owner, one which makes me happy every time I hear it. This article is part one of a three-part series of how to plan for and manage the expenses that come with a growing business. So, you got that potential prospect to sign the contract that you were hoping for and it is now time to implement impactful and business-changing results for your new client. Let’s get started. Oh, but wait: how are you going to deliver such impactful and fabulous results with your already bursting schedule and commitments? It is time to figure out if you can afford to hire that next talented person who can help you propel your business forward. Whether it be administrative support staff who can handle some the ongoing office management tasks, a skilled and talented laborer in your trade, or a consultant who is going to lead you to excellence, the task at hand remains…you need more time than you have available to deliver fabulous results to your new client. In the next few paragraphs, I will discuss three suggestions to help you analyze your current business positioning and determine what kind of support is needed to help you deliver on your promises with accuracy and excellence.
First, analyze the current business profitability. You need to make sure your different revenue streams and the related expenses are accurately aligned. I worked with a recent client who is a consultant. The business offers one-on-one coaching for new businesses, marketing plans for established businesses, and speaking and writing. These are all examples of different revenue streams. They all have different costs associated with delivering upon these services. There are relatively limited costs that are associated with the coaching as the business owner is self-delivering these services. However, the marketing plans do require some additional outside talent to reach their deliverables. The speaking workshops requires a different set of costs: rented venue space, attendee food and beverages, lighting, technology, workbooks and handouts for students, etc. Being an author requires yet another set of expenses including: securing a copywriter, ghost writers and editors, publishing and printing costs, selling channel expenses, a potential for royalties paid, and more. If the business owner does not align the profit with the impact of the expense, they have no way of knowing which are the revenue streams that are propelling the business forward and which are holding the business back. This is so important because if you don’t know those numbers going into a new client, you won’t know how to support the change that is coming with the onset of new client work.
Once you have a full understanding of your financials, you need to make a list of costs that are a direct result of your new client. These are called your Cost of Goods Sold. If you are selling books, then direct costs and materials include the cost of printing, distribution, warehousing, and order fulfillment. If you are selling a service like a marketing plan, you too, would experience a cost of goods sold whenever you hired a contractor to help you execute new thoughts, ideas, and visual images like a video or website design on behalf of the new client. Cost of Goods Sold is directly related to your client deliverables. It has nothing to do with how much you pay to rent office space for your business or how much you yourself spend to advertise and market your business. It is only those expenses that are directly related to the client. If this is confusing to you, then ask yourself if you would have the expense if you did not have the new client. If the answer is no-that you are incurring additional expense as a result taking on your new client, then you can consider these to be costs of goods sold. Cost of goods sold expenses are proportionate to your new revenue. Here is an example. If you charge a new client $1000 to write a new marketing plan for them and you pay an expert $400 of that $1000 collected from the client to help you write that marketing plan, you have a 40% cost of goods sold. You also have given yourself a 60% gross margin. That means that your real revenue from the new client is $600. One can assume that the next time you sell a new marketing plan for the client, you will have to spend 40% of the revenue collected from the client to pay for Cost of Goods Sold. Now that you understand what your cost of goods sold is as it relates to your new client, you also know what real revenue is. The Real Revenue is what you have to work with when considering most importantly-how much you can pay yourself and also how much you can afford to spend on hiring additional help so you can scale and deliver your services to more and more people.
The last step in determining if you can hire some additional help is to use what you have learned in steps one and two and apply it in a way that will make the most impact within the framework of your current organization. Hiring additional help is proportionate to what they have determined they are creating in real revenue, and how much they need to pay themselves. For example, we frequently work with business owners who deliver amazing results to their clients in their fields of expertise. However, they waste time and energy managing their own bookkeeping. They are not good at it so it is not their core competency, they often loathe the work, and they are slow to complete the bookkeeping. The opportunity cost of doing the work themselves can be detrimental to their business, because most often the owner of a small business is the only person who generates sales in the company. Once they make the decision to outsource the bookkeeping, they not only free up their time and talent to do other things, they also are able to get price quotes out the door faster and hopefully turn more new business because they have the data to do so at their fingertips.