Know your numbers
Blog #4 in a series of 6
A few questions
How many units have you got to sell at what price to go from break-even to profit?
How much cash will you have in the bank in one month’s time?
What’s the return on investment on buying that ERP software to help handle order processing?
If you know the answer to these questions, then you’re ahead of the game. You’re likely to have good control over your numbers. If you don't know the answers then you need help to set up systems that put you in control.
If you can pick up to 6 key numbers that are critical to your business’s success, put them on a dashboard and monitor and control them continually then you are on a good pathway to being able to make the right decisions at pivotal moments in your business’s growth.
There’re obvious numbers like unit cost / profit, cash flow etc but what about product wastage? The cost to my business of a customer complaint of imperfect product was 80 times its wholesale price. If one of my products was dropped and damaged in my factory, the cost to my business was 3 times the cost price. Knowing what your business should be earning and what it is actually earning net of wastage is fundamental.
Perhaps a critical number will be the percentage of ‘on time’ order fulfilment. The very first thing that your customer judges you on is whether your product gets to them in perfect condition, on time, with the right paperwork – or not!
If you wanted to be a little more esoteric then perhaps a critical number could be your consumer’s perception of your product. Have you tried actively collecting and collating consumer feedback and turning that into a business-critical number every 3 months? It’s a powerful and often revealing metric that will strongly influence your business decisions.
Less is more
Whichever numbers you choose, make sure that they are crucial to your decision making. Don’t be like the buyer of a major food wholesaler who I visited. He showed me a 10cm high pile of computer print out which had the sales and profitability each week of each of the 2,500 products that he was responsible for. I said ‘wow! impressive’. He said, ‘not really’, it would take me 10 hours per week to go through that information and I haven’t got the time!’.
The profit formula
One of the big decisions for startup food and drink entrepreneurs is whether to manufacture for themselves or to find a manufacturing partner. There are significant differences in investment commitment to either decision however before you even get to that point you must understand the different dynamic in product costing.
For example, if you manufacture for yourself, you will enjoy the full profit margin from the wholesale price minus the cost of manufacture to, but you’ll need that margin to pay for the much higher cost of operation. And don’t forget to factor in the cost of distribution to your customer.
If you’ve found a suitable manufacturing partner (not easy!) then you’ve significantly reduced the amount of investment capital that you’ll need but you’ve also reduced your profit margin substantially. You’ve become the sales and marketing agency for your brand and you will earn the profit after the cost of manufacture minus the manufacturer’s profit margin. Whether you distribute your product, or your manufacturer does is entirely dependent on situation and negotiation.