Understand the Power of Small Numbers
As business owners, we are always on the lookout for the next “big thing” to transform our business, taking it to that next level of revenue and profitability. Often, these initiatives will come at a cost: relocating, renovating a store, investing in advertising, or adding another salesperson. We might sit down with our accountant or advisor and develop a business plan to show the benefit of the expenditure. Very likely, we will have budgets and cash flow forecasts to support our goals.
Every business has a place for budgets and cash flow forecasts, but this is not necessarily the place to start if you want to improve your already established business.
In this article, we will look at how small improvements in two key areas will improve profitability: conversion rate and margin.
Let’s start with a business doing $3m of revenue with four salespeople achieving an average GP of 28%, generating $840k of Gross Profit annually. As a starting point, if we know the average sale is $3,500.00 and the conversion rate is 50%, we can calculate that each salesperson had 428 opportunities and converted 214 (give or take). If you think your conversion rate is higher than 50%, your business would be an exception; many flooring businesses have conversion rates well below 50%.
What happens if we increase sales by just one sale per salesperson per month? Across four salespeople, our conversion rate increases to 53%, our revenue increases by $168k, and GP grows by $47k, most of which goes straight to our bottom line.
What have we done differently? Instead of starting with the big goal of lifting Revenue, we have instead started at the point of lifting sales by one sale per month per salesperson. This, in turn, lifts our conversion rate to 53%, and revenue and GP follow.
Another small number we can look at is our margin. What happens to the total GP for this business if we lift margin by 1%? We add a further $30k to our bottom line.
With two small numbers, we have lifted the total GP on this business from $840k to $920k.
The bonus is it requires no investment other than the time to pay attention to conversion rate and margin.
Unsurprisingly, a typical response I often get at my “Power of Small Numbers” presentation is “easier said than done”. Well, yes, most things are, but it’s not difficult. What it does require is paying attention to things we don’t usually pay attention to; how successfully are our salespeople managing our opportunities, and what margins are they achieving when the job is installed (generally lower than the margin quoted initially)?
With so many moving parts in a flooring business, we can lose sight of the key things that drive profitability:
1. Attention to conversion rate.
2. Focus on margin.
The biggest mistake we can make as business owners is to leave conversion rates and margin in the hands of our salespeople. Left to their own devices, your sales team will see conversion rates fall, and their margin remain static (at best).
Of course, there are many more elements we need to have in place to be a flooring business. Assuming these are in place, conversion rate and margin are the two levers you have the easiest and least costly access to.
The biggest challenge most flooring businesses have is they don’t have access to the information they need to inform them on conversion and margin. Getting this information is time-consuming and often inaccurate. Every business needs an integrated business management system that provides owners with timely information at the push of a button. RFMS is a fully integrated solution for flooring businesses, and we would be happy to arrange an online meeting to show what RFMS might do for you.