Understanding your numbers to improve your bottom line

1. Understanding your numbers to improve your bottom line

2. Welcome • Congratulations • Who is TaT Biz? • Your workbook

3. Understanding your numbers to improve your bottom line • What gets analysed gets improved. It's why sporting teams review statistics after every game. • Understanding your numbers allows you to make better business decisions. • When better decisions are made, a better business generally follows.

4. Understanding your numbers to improve your bottom line • Awareness alone will generally give you a 10% improvement in your gross profits. • Everyone has different skills sets. Some are strong in this area and others are weak. • Today everyone needs to be open minded and be looking for a couple of ideas that will help improve their business.

5. Today's agenda Section1: Understanding profit and loss statements (P&L) • Review a basic P&L statement • Calculating gross margin • Common P&L mistakes • Margin versus markup • Profit does not equal cashflow Section 2: Budgeting and building a financial dashboard • Building a P&L forecast budget • Calculating the break-even point • Monitoring performance through the financial dashboard Section 3: Structuring the workforce within a business • Structuring a business to achieve its goals • Allocation of duties using a responsibility schedule • Recording and analysing team output • Reviewing technician profit contribution

6. Section 1:Understanding a Profit and Loss statement (P&L)

7. The P&L statement Total income / sales - Cost of sales = Gross profit - Fixed expenses = Net profit / loss

8. The P&L statement • Total income / sales – This is the total $ of sales. Ideally it should broken up into labour sales and parts sales. • Cost of sales or goods sold (COGS) – This is the cost of the parts used to repair vehicles. (The price that you bought them for – don’t confuse this with the price you sell them for). These are sometimes referred to as variable costs because these costs are only incurred when you make a sale. • Gross profit – This is the difference between your total sales, less the cost of goods sold. This is the amount of money you have left over to run the business.

9. The P&L statement • Fixed expenses – Sometimes referred to as overheads. These are all of the general expenses incurred in running the business. They are called fixed because you will incur them regardless of whether or not the business is open. • Net profit/(loss) – This is what's left over after all your expenses have been paid. This is what you will pay tax on. This is different to what cash you have in the bank account. This will be discussed later. • These numbers are all GST exclusive because GST is not your money. • Here's at standard P&L statement Presentation Documents\TaT Motor P&L Statement.xlsx

10. Calculating gross margin Gross margin = Gross profit / total sales Total income $560,000 - COGS $202,000 = Gross profit $358,000 ÷ Total income $560,000 = Gross margin 64% • Gross margin is the expression of your gross profit as a per centage of sales. • This means that for every dollar of every sale there will be 64.5 cents left after buying the parts required for the repair.

11. Calculating the gross margin • Who knows and actively monitors their gross margin? • You need a gross margin target and you need to monitor your progress towards this target regularly. • Look at the impact of movments in the gross margin: Workshops A B C D Sales $560,000 $560,000 $560,000 $560,000 X X X X Gross margin 60% 65% 70% 75% = = = = Gross profit $336,000 $364,000 $392,000 $420,000 • Workshop A works just as hard as workshop D but they make $84,000 less gross profit. • An excellent gross margin is around 70%.

12. Calculating the gross margin How can the gross profit and gross margin be improved? • Increase your prices • Re-negotiate better rates with suppliers • Sell a greater number of higher-margin services • Be more efficient with your labour

13. Calculating your gross margin • Labour is the only product you sell that is all gross profit. • Therefore the more labour you sell, the higher your gross margin will be. • To achieve this you need to have controls and procedures attached to your labour. Labour sale $100 - COGS $0 = Gross profit $100 ÷ Total income $100 = Gross margin 100%

14. Common P&L mistakes • Business P&L statements are presented incorrectly all too often. • Although it has no impact on the overall profit/loss it has an impact on the owner's ability to monitor performance. • The most common mistake is that overheads get allocated to COGs or COGs get allocated down in overheads. • Here's an example P&L: Presentation Documents\TaT Motor P&L Statement.xlsx Presentation Documents\Bad Example P&L Statement.xlsx

15. Margin versus markup • These are two different calculations that often get confused when trying to determine product pricing. • Margin = gross profit / sale price Margin works down from the selling price, stating what per centage of the sale is left after subtracting the costs. • Markup = gross profit / costMarkup works up from the cost stating by what percentage an item sells above its cost.

16. Margin versus markup • Understanding these terms is critical as they will impact on your overall gross profit. • Example product sale Sale price $300COGS $100Gross profit $200 • Margin = $200 / $300 = 66% • Markup = $200 / $100 = 200%

17. Margin versus markup What markup should you use? • There is no written rule. You need to be mindful of the recommended retail plus what the job is worth. • This calculation is complicated by the fact that the majority of your invoices will have a labour component. • Labour has no cost, so it will exaggerate the markup applied to the total invoice.

18. Margin versus markup

19. Profit does not equal cash flow • Net profit is not related to cash in the bank. • Cash is real. Profit is just on paper. • This explains why many business owners judge their performance by what's in the bank account and not by how much profit they make. • Two key reasons for this: • Timing difference • Not all cash payments are an expense

20. Profit does not equal cash flow Timing difference This is the difference between the recording of the sale or expenses for accounting purposes and the actual receipt or payment of cash. Common example includes debtors (accounts receivable) and creditors (accounts payable). Assume you make a $400 sale today and the customer pays you in 30 days time. 30 days Dr Cash at Bank $400 Cr Debtors $400 P&L = $400 Bank account = $400 Today Dr Debtors $400 Cr Sales revenue $400 P&L = $400 Bank account = $0

21. Profit does not equal cash flow Non-expense cash payments Some of your cash payments are not an actual P&L expense. Most common example are asset purchases and principal loan repayments. Assume you bought a $5000 scan tool outright. (This rule does not apply to assets under $1000) Year end Dr Depreciation Expense $1000 Cr Asset $1000 P&L = $1000 Bank account = $5000 Today Dr Asset $5000 Cr Cash at bank $5000 P&L = $0 Bank account = $5000

22. Profit does not equal cash flow Non-expense cash payments Interest payments are an expense. Principal payments are not an expense. Assume you borrowed $50,000 today and made a $10,000 principal lump sum payment at year end. Year end Dr Loan liability $10,000 Cr Cash at bank $10,000 P&L = $0 Bank account = -$10000 Today Dr Cash at bank $50,000 Cr Loan Liability $50,000 P&L = $0 Bank account = $50000

23. Section 2:Budgeting and building your financial dashboard

24. Building a P&L forecast budget • How many of you have a P&L forecast and are working towards reaching it? • It has been proven – those businesses that have targets will do better than those that don't. • There are two sides to budgeting: • Revenues • Expenses • Most of your point of sale machines will have a budgeting function. The advantage of this is that you can review actuals against budget at the end of each month. • To make a budget worthwhile you need to review progress towards it. • Revenues weekly • Expenses monthly

25. Building a P&L forecast budget Revenue forecasting • Revenue budgets can be set based on: • What was achieved last year • What the potential may be • Ideally, a combination of both 1. and 2. should be used as a starting point. • Refer to attachment xx of your workbook for an example revenue calculator. Presentation Documents\Sales Revenue Calculator.xlsx • The revenue target is now transferred to P&L forecast budget. • The individual targets are also used to evaluate staff performance.

26. Building a P&L forecast budget Expense forecasting • Easiest when you have last year's number in front you. • Review each number and ask yourself what is going to be different from last year. • Monthly or annually? • Refer to attachment xx of your workbook for an example P&L forecast template. Presentation Documents\TaT Motor P&L Forecast.xlsx • This becomes a critical exercise when your staffing structure changes because you need to be sure that the addition of another employee is going to have a positive profit contribution on the business.

27. Calculating your break even point • Break even is the point at which your business generates sufficient revenue to cover all expenses. • Understanding your break even is important because it gives your actual results more meaning. • Break even point = Overheads ÷ Gross profit % margin. • This is quite a good figure to show to your staff because it gives them a greater awareness of just how much it costs to run the business. • Refer to page xx of your workbook for an example break even calculator. Presentation Documents\Cash Break Even Calculator.xls

28. Monitoring performance through your financial dashboard • The financial dashboard is simply a tool used to monitor your Key Performance Indicators (KPIs) • KPI is a mattrix used to define and measure progress towards achieving objectives or critical success factors. • Therefore to give your actual results meaning you need to set targets for each of your KPIs. • KPIs will vary from business to business. • Refer to attachment XX for an example financial dashboard. Presentation Documents\Financial Dashboard.xlsx

29. Section 3:Structuring the workforce within your business

30. Structuring your business • What is your business going to look like when it is finished? • Typical business structures: • Sole trader • Owner with full time involvement plus staff • Owner with part time involvement plus staff • Under management • Most people would choose to be 3. That is, to be involved but don’t want be at work 100% of the time. • What ever you choose, you need to ensure that your organisational structure is aligned with your business goals. • This planning needs to happen even if you’re still a sole trader. This way you are clear about what employees you need and what they will be required to do to help you achieve your goals.

31. Structuring your business 1) Sole trader

32. Structuring your business • Sole trader Advantages • Low overheads • Don’t have to manage staff • First person recruited would be another technician or a part time bookkeeper. Disadvantages • Owner has to do everything. • When the owner takes time off no revenue is generated.

33. Structuring your business 2) Owner with full time involvement plus staff

34. Structuring your business 2) Owner with full time involvement plus staff Advantages • Head technician has been recruited to take responsibility for the workshop. • Delegation of monotonous tasks to the bookkeeper. • If technicians deliver high output the business should be more profitable than if it were a sole trader. Disadvantages • When the owner takes time off the head technician will fill his service manager role meaning the loss of output. In addition, they perform a role with which they may not be comfortable. • Owner is pulled toward the tools during busy times so an admin assistant can be recruited. Wages increase but the owner is still stuck to the front desk as every complicated customer enquiry still has to go through them.

35. Structuring your business 3) Owner with full time involvement plus staff

36. Structuring your business 3) Owner with part time involvement plus staff Advantages • Owner has more freedom and is not required to be there 100% of the time. • When the owner take time off a service manager and a head technician still perform their roles. • Generally, owners are the best technicians and can achieve more than 100% efficiency. • Because there is a full time service manager, there is no need for a full time admin assistant. Disadvantage • With only two other technicians, the owner will still have to output around 20 hours of labour per week to generate sufficient revenue to cover the extra costs of employing a service manager.

37. Structuring your business 4) Under management (owner part time)

38. Structuring your business 4) Under management (owner part time) Advantages • Owner has flexibility and time to work on the business. • Owner can easily cover employees when they are away, reducing the impact on the business. Disadvantage • Four technicians are needed, operating a 100% capacity, to cover large overheads and maintain profitability. • If the owner neglects general manager duties this structure will not be financial sustainable.

39. Responsibility schedule • Once the structure is chosen, duties must be allocated to each of those positions. • If this is not done, things will be missed or done incorrectly. • Some classic team excuses: • 'I forgot' • 'Didn't have enough time' • 'Thought someone else was going to do it' • What impact does this have on you and your business? • Frustration for the owner • Annoyed customer • Wasted time

40. Responsibility schedule • Just telling your team to do something does not mean: • it's clear • it's going to get done correctly • A responsibility schedule is simply an allocation of all the tasks and duties in the workshop to an individual so that everyone is very clear on who is responsible for what. • Refer to attachment XX of your workbook for an example responsibility schedule. • Presentation Documents\Responsibility Schedule (Large Workshop)-Apr2012-GM-KN-CapConv2012-NonExcl.docx • Presentation Documents\Responsibility Schedule (Small Workshop)-Apr2012-GM-KN-CapConv2012-NonExcl.docx • Once completed, your responsibility schedule will make recruitment so much easier because you are now very clear what you are looking for.

41. Responsibility schedule Building your responsibility schedule • Get your team to start this project by listing down all the tasks and duties they have to complete to ensure the successful running of the business. • Build on this by allocating tasks and duties they have missed. • Sit back and review. Is this too much, or too little? • How much detail? Enough detail to ensure it gets done correctly. You may even like to allocate your duties between: • daily tasks • weekly tasks • monthly tasks • as-required tasks

42. Responsibility schedule Building your responsibility schedule • Review the schedule with your team to gain agreement and ensure they are clear on each task or duty. • Display the responsibility schedule in your office and staff lunch room so you and all your team are very clear on who is responsible for what. • To maintain its effectiveness you will need to update your responsibility schedule when: • a mistake is made, or something gets forgotten • the people and processes within your business change • Once complete, the information can be incorporated into your team agreements and incentive scheme.

43. Recording and analysing team output • This section has two key parts • Recording and collating the information • Acting on what the results tell you • Information you may like to record could include: • Number of jobs completed • Total sales invoiced to customers • Average $ per job • Actual time worked at the workshop excluding breaks and lunch • Actual time spent repairing and servicing vehicles • Actual time invoiced to clients • This information should come from your POS. Refer to attachment XX of your workbook for an example technician performance report. Presentation Documents\Technician Performance-Apr2012-GM-KN-CapConv2012-NonExcl.pdf

44. Recording and analysing team output • If your system can't deliver this information you will have to use some form of timesheet. Refer to attachment xx of your workbook for an example time sheet. Presentation Documents\Weekly Time Sheet-Apr2012-GM-KN-CapConv2012-NonExcl.xlsx • The service manager or technician can fill out the time sheet. • If you are going to use timesheets they must be updated after every job. • They are not hard to fill out. Staff may protest because it makes them accountable for their time.

45. Recording and analysing team output • Once you have recorded your information, it's time to start reviewing the results and acting on what they are telling you. • Two key terms: • Technician productivity – this is a comparison of the total time invoiced to customers versus the total available hours during the same time period. • Technician efficiency – this is a comparison of the total time invoiced to customers versus the total time spent repairing or servicing their vehicles. • Refer to attachment xx of your workbook for an example labour review template. Presentation Documents\Labour Review Template-Apr2012-GM-KN-CapConv2012-NonExcl.xlsx

46. Reviewing technician profit contribution • If you have collected your individual technician results you are able to assess their profit contribution towards the business. • You need to ensure your resources are going to staff who generate results. So if you are going to pay top dollar, you need to see a return on that investment. • This can be used when deciding on: • rewarding existing staff • recruiting new staff • It's obviously not just about money. A champion team will always beat a team of champions.

47. Reviewing technician profit contribution Employee 1 Sales revenue $298,080* Gross margin 65% Gross profit contribution $193,752 Cost of employment $95,000 Overhead allocation $50,000 Net profit contribution $48,752 *= 36 hours per week at $90 per hour over 46 weeks plus parts sold = 90% productivity on a 40 hour work week Employee 2 Sales revenue $207,000* Gross margin 65% Gross profit contribution $134,550 Cost of employment $60,000 Overhead allocation $50,000 Net profit contribution $24,550 *= 25 hours per week at $90 per hour over 46 weeks plus parts sold = 62.5% productivity on a 40 hour work week

48. Reviewing technician profit contribution • The lowest costing employee does not always deliver the greatest return on investment. • You can pay your staff high wages if they deliver high output. • Apprentices and junior staff are an integral part of any business because they can be allocated non-productive and less skilled tasks. • This must be done in conjunction with other non-financial contributions. • This calculation can be used to determine the optimum staffing structure for your business.

49. Summary and action sheet See page XX for summary and action sheet • You have been introduced to a number of new strategies and concepts to help you improve your bottom line through increased financial awareness. • To achieve real results you will need to take action and implement what you have learnt. • Read through the strategies and select the ones that you need to work on and implement in your business. • List down the actions you will undertake to implement the strategies you have selected. • Ask someone to hold you accountable.

50. One-on-one mentoring • If you want more out of your business, mentoring might be for you. • This is a results-driven program where we meet for one hour each fortnight to help you implement the required improvement strategies. • Results vary from business to business. • The first step is an introductory phone call to determine if the program is a match for you and your business. • If you are interested, please fill out the form and leave it with me.