The news is filled with so many stories about the “Looming Fiscal Cliff” that we all want to just tune it out. For most small businesses, the fiscal cliff that they should be most concerned about is the one they are facing themselves. How and when you deal with your own fiscal cliff will affect you far more than anything that’s happening in Washington.
Whether you use NSPG products or not, this challenge affects you.
One of the services we provide here at NSPG is our Numbers Cruncher review. This service includes a personalized review of Numbers Cruncher user’s business costs and productivity. We check to see if their major expenses make sense for their company size, and if their productivity estimates make sense. We try to help users spot things that could affect their profitability and competitiveness. There are some problems we see over and over again.
Problem: Many businesses mistakenly count their helpers and other non-productive employees (supervisors/managers/office etc.) as productive field labor. This inflates the estimate of hours that the business sells which makes what they charge too low. This type of error can make the business lose money on every job they do.
Solution: Since what you charge is essentially based on business costs divided by productive hours, you must estimate both numbers as accurately as possible. On a regular basis (monthly/quarterly), you must review how many productive hours your business actually sells. Productive hours are the number of hours that you actually get paid for not the number of hours you are paying your people. Helpers and supervisors whose costs are not built into the job should be classified as overhead. If you count them as productive hours, you will lose money.
Every time you review your numbers, you should take a quick look to be sure that your employees’ time is being counted properly.
Problem: Many businesses don’t allocate money for necessary business overhead expenses. We often see companies with no dollars allocated for retirement or healthcare. No dollars allocated for depreciation of the vehicles they own. Most have very low amounts budgeted for advertising and office staff. These items are integral to growing businesses. If they are missing, the business can stagnate and eventually fail.
Solution: You must set reasonable spending levels for all of your business expense categories. Things like healthcare and retirement don’t seem to directly affect your profits, but they will in the long run. No one can work forever. These type of personnel benefits allow the business to attract and keep top performers. Allocating money for maintaining business equipment and attracting new customers is critical to your business’ health. Things like advertising and depreciation may not affect your profits today, but they will over the long term.
If you don’t think you can add in all these items to your budget at once, you can ramp them up over time. Increase you advertising budget by a fixed amount slowly over time. Offer retirement/health plans that rely on business and employee contributions and ramp up the business’ contribution slowly over time. Hire part time office help with the goal of slowly building a full-time team. A well run office will more than pay for itself.
After you have the numbers in line, comes the hard part. You must actually change your prices, and start charging what you need to make a profit every day. Print your new price books, and stick with it. Discounting to win jobs is a strong temptation, but often weakens the company. Covering all of your expenses and earning a profit every day is critical to strengthening and growing your business.
Avoiding your own fiscal cliff requires just a few hours of work on the numbers and the courage to charge the right amount. It’s not particularly complex, but it should be a priority. It’s how all businesses grow and maintain profitability over the long haul. Once you have the process in place, you’ll never face the fiscal cliff again.