Financial train wreck: How we avoided it

Until June last year, I was still using total revenue as a measure of success.

Feeling like a hero, I got a buzz from watching that number get bigger.

Looking back on it, it makes the list of the stupidest things I’ve ever done. 

The number might be exciting, but often it says nothing about profit. 

(The bit that’s left over at the end of the year)

Frustratingly, for me, there was no profit.

We were generating all this revenue which makes you feel like you’re doing well, but at the end of the week, month, or year, there was zero cash sitting in an account. 

There are loads of factors that contribute to that:

• High labour costs
• Inefficient processes
• Increasing cost of goods
• Incorrect pricing structures

When I started to see it, my first instinct was to blame the ‘world’ - The shitty economy or damn Covid.

But after you realise that no one is coming to save you, you have to just get on with plugging holes in your leaky business.

We started putting everything under the microscope - beginning with our biggest costs. 

And like many businesses these past years, we had to make some tough calls a year ago to reduce the team size a little.

But there was one other thing that I learned during that time that’s so freaken obvious now, but wasn’t obvious at the time…

Not All Revenue Is Equal. 

(At this point I can hear you say… “Duh, Jarrod”)

But when you’re a super cash-strapped small business, you quickly fall in love with ANY revenue. 

If someone calls you and say’s “Hey, can I buy your stuff?”, you normally reply with “Yes, take as much as you want” instead of analysing the quality of that revenue. 

We started to pull apart all of the different revenue streams we had. 

• Direct to customer
• Wholesale
• Catering
• Retail

Then we started looking at the cost of goods for every product we sold in each of those revenue streams.

I nearly fell off my chair when I saw how unprofitable some products were in some revenue streams. 

We were selling a heap of things at a loss (or close to it).

By accepting the wrong revenue, it was sending us broke. 

(whoops!)

So here’s how we rapidly turned the ship around.

Analysis

The first thing we did was analyse our true costs of goods (including labour).

What does it cost you to make, package and deliver a product?

We didn’t use fancy software for this, just an Excel sheet and made sure the numbers were accurate.

Then we ranked the products from best to worst so we could clearly see what we were facing. It wasn't good.

The next step we took was...

Benchmarking 

Compare pricing against similar businesses in our city.

For example, just last week we went to other bakeries and bought a range of products.

It turns out that ALL of our competitors are more expensive for a smaller version of one product we sell. 

Think about that…  

They spend less on cost of goods to make it and then charge more than us.

That’s pretty silly on our part and not catching this sooner has put a huge financial strain on us.

No doubt this could be happening to you too for products you sell lots of so get onto benchmarking.

The last big part is...

Labour

This time last year our labour costs hit 60%. 

We were losing money fast!

Thankfully we’ve reeled that in a lot since.

And one of the ways we did it was by looking at what was wasting the team's time.

We found that we were making products that took ages to make, had multiple complex steps, were often inconsistent or needed to be remade to hit the quality we expected.

Think about that:

1. They're time-consuming
2. They're problematic
3. We don't sell many

Not ideal.

We focused there.

We looked for alternative products that did the same job for our customers and were way easier for our team to produce which reduced labour.

Those three things combined allowed us to build massive momentum and fix the business.

Now, we need to wrap up so let's summarise…

I’m going to assume you’re trying to make a damn good product and offer excellent service. 

(Anything less than that these days and you’re in trouble)

 When you focus on getting your pricing right, reviewing your cost of goods since Covid, and trying to find ways to help your team be more efficient with their time instead of doing the same things you’ve always done, you’ll be a long way ahead of the rest of the players in this game. 

It’s surprising how many people are still sleeping on getting the basics right (including me).

I hope it helps!