In this article we will discuss the 5th Primary Internal Practice every company must have to achieve 9 Figure Success. This Primary Internal Practice is Finance.
Our definition of Finance which is the whole Financial department. As your company grows it will reach the point where you recruit a Chief Financial Officer, depending on various criteria the hiring of this executive will most likely not occur before you reach around Fifty Million ($50,000,000) in gross annual revenue. Initially, you will start with a knowledgeable bookkeeper who understands how to manage accounts receivable, accounts payable, and General Ledger.
This is good but it does not help you understand the true meaning of Net Profit. Every company should be aiming to achieve and maintain Twenty Percent (20%) Net Profit.
Net Profit is not the same as gross profit and we have coached business owners that have been in business for over twenty (20) years that have not understood the correct meaning of Net Profit. The facts are that if you do not strive to maintain Twenty Percent (20%) Net Profit you company will struggle to grow.
Let me show you a simple example of how this works. Regardless what your product or service is, you have Cost of Goods Sold (COGS). This is the first place most Founders make a mistake because they don’t understand what comprises Cost of Goods Sold (COGS). In this example; which is incomplete compared to what is in a real business because this is an article to open your mind not a book to teach you everything you need to know; you need to combine all the costs involved in delivering your product or service. Please understand there is a big difference between business models. A company that makes a product has uses a totally different methodology to calculate Cost of Goods Sold (COGS), than a service company which has a team of people that deliver a service to a customer.
Cost of Goods Sold (COGS) needs to take into consideration all costs that your company incurs to deliver the product or service to your customer. Let’s assume you are making a wooden chair. Your Cost of Goods Sold (COGS) is going to be the cost of the wood you used to make the chair. Plus, the cost of the finish you put on the chair, paint, varnish, shellack or whatever. If it has a padded seat, the cost of the padding, cloth, thread, etc. that was used in making the padding. Plus, the cost of the space in your factory where you made the chair. If it took you one hour to make the chair, you calculate the total square feet of the area or areas used and the percentage of the monthly cost of that space and calculate this total cost. Now you need to do the same calculations for making the padded seat for the chair. Now you have to package the chair for shipping and again you have to calculate the material cost, space cost and labor cost for this process. Now you put this into your warehouse and store it until you receive an order for the chair. This calculation needs you to track your turn rate. Or, how many chairs do you sell (turn) every month and what is the cost of this space while you are waiting for the chair to turn.
Plus, you need to calculate the labor of all the employees needed to perform all these responsibilities and everything else that goes into the Production of the Chair. All of these items when added up. All of this is you Cost of Goods Sold (COGS).
When you have the Cost of Goods Sold (COGS) you need to estimate how many of these chairs you will turn in a month to calculate the percentage of your accounting department costs, marketing costs, sales costs, Finance department costs, Human Resources costs, Information Technologies costs, Quality Costs and your Executive office cost, this is all called your S,G&A, budget or Sales, General and Administrative costs.
I am certain you have heard many times in your life, The Devil is in the Details. When we see a company having a Net Profit that is not close to twenty percent (20%) we know management does not know how to manage costs properly or that they have not priced their product or service properly or that they are allowing sales too much latitude so it is robbing the company of its net profit.
Our decades of experience knows the problem is never one department, the problem is always the executive team being overwhelmed with everything that needs to be done and the company bleeding profits in numerous areas and each bleed is small enough that management doesn’t know where to begin to fix all the bleeds.
Until next time …