Restrictions are unwinding in Australia but what we knew as ‘normal’ may never be again. The focus in recent times, rightly so, has been squarely on cash flow. My fear is that this relentless focus on money to pay for the bills today and tomorrow has left entrepreneurs blindsided when it comes to the main reason they are in businesses – to make a profit! Every decision made in business has a consequence in dollars. Meanwhile the cost structure of almost every business has changed. These new dynamics have left businesses in the dark when it comes to decision making with profit in mind.
The questions every business operator needs to be able to answer are “What sales in dollars or units do I need to cover the cost of hiring employees, buying equipment, changing production or the service model? And, most importantly, “How do I target the Net Profit figure I want and need in the post-COVID world”?
The solution is to understand the new ‘break-even’ position for your business. In doing so you will come up with a two-digit formula called a Contribution Margin (simpler than it sounds). This formula is small enough to fit on a postage stamp, yet powerful enough to guide you through every decision you will need to make in your business.
Finally a word on pricing, the biggest decision for any business. The Contribution Margin allows you to be able to answer this “If I put up my prices or I reduce my prices, what sales can I afford to lose or need to gain, to continue to make the same level of profit”?
I have had many conversations with business owners over the last few weeks on this very topic – café owners and restauranteurs, local retailers, tradespeople and professional service providers. Everyone is asking for some guidelines to help them make decisions critical to the success of their business. I’m facilitating half hour webinars on this topic to help as many business operators as I can with their post-COVID journey. Click here for more information.