Edmonton Business Consultant | Revenue Wont Fix A Broken Business Model
The most common one is they do need more sales, but then there’s the other category of business owners were even if they get more sales, they’re still going to have cashflow issues. Yeah.
Yeah. I can see why I can be because it’s mad.
Hi. Thanks for joining us for another episode of ask Spurl CPA today is the Evanton business coach. We’re talking about how revenue won’t fix a bit broken business model. Again, as he had an business coach. We’re talking about how revenue won’t fix a broken business model. We have Denise here with us. Uh, Denise, how has the content been going on the always bookkeeping side? What’s the monthly cost goods for doing? Yeah. We didn’t get into, yeah, getting the videos on the door weekly. We are, yeah. It’s always a struggle. I think we hear that from a lot of clients, right? That that’s a really hard thing to do when you’re not used to it. Yup. Uh, but now we’re getting it there can be done so they can be. Yep. The quote that we have here today is a Warren Buffett quote. You know, all time, great investor accounting is the language of business.
And the statistic that we have is 50% of all Canadian businesses go out of business in the first five years and 29% of these failed businesses will list or running out of cash is one of the primary reasons for their business failure. Uh, making it the second most common reason running out of cash is the second most common reason that businesses go out of business. And the story that we have here, we have business owners, they’re experiencing a cash crunch and they think more sales is the answer. So Denise, what are the questions that you think these business owners should? Yeah. You asking? Yeah. So, um, do entrepreneurs often focus too heavily on expenses rather than on sales? Yeah, so generally that that is the problem. I mean, this is a lot of times Edmonton Business Consultant business owners, they’re looking at, you know, how to fix their business.
They have cash grants. I can’t pay the bill. And they’re thinking too heavily on, hey, we need to minimize expenses. We need to minimize expenses. Remember they don’t have enough sales for it to be meaningful at all anyway. So there are a lot of entrepreneurs who do focus too heavily on reducing expenses rather than spending their finite amounts of time on increasing sales. So it is a common one problem. Yes. Edmonton Business Consultant, we’ll, some businesses continue to have cashflow issues even with more sales. That’s right. But then there’s the time where even if they do focus on the sales or something fundamentally wrong in the business, that even if they do increase the sales, you know, they grow the sales by 10% 20% 50% or even a hundred percent they’re still going to have cashflow problems. We’ve run into them again. So there, there is that balance between the or there is some, uh, there’s a lot of business owners.
I would say the most common one is they, they do need more sales. But then there’s the other category of business owners where even if they get more sales, they’re still going to have cashflow issues. Yeah. So Josh, what is it? Gross margin. So the gross margin is really, you know, it’s the, the gross profits after you pay for the direct costs of the, you know, the product or service that you’re offering. So, I mean, if you’re a plumbing contractor, um, your Edmonton Business Consultant gross profit is really, you know, your revenue less, your costs of supplies less, your subcontractors use less your Labor that was actually used on site. You know, the costs of the guys that were on site. You know, if you’re a dentist, it’s your revenue less than cost of the hygienists and associate dentists less the cost of the lab fees. You know, that is the gross margin.
Before we get into any overhead expenses, the rent insurance, the accounting, the interest and bank charges, it’s the gross margin just from those costs that are directly correlated to generating more revenue. They go up and down directly with that revenue. That’s the gross margin. So why is it important to understand the gross margin? It’s important to understand the gross margin because if there is no gross margin, it doesn’t matter how much work that you’re going to do, you’re always going to have a cashflow problem. You know what, Edmonton Business Consultant run into it, especially with a lot of construction companies, they’re, they’re, they think, yeah, they get a deposit in from the job and the cashflow was good, but it doesn’t matter. By the time they get to the end of the job, they’re, you know, they’re losing money on the job where the margins are so thin on the job that there’s nothing going to be leftover at all.
So it’s really important to understand that gross margin because if we don’t have the right gross margin, it doesn’t matter how much we sell, we’re never going to have enough money for this to, you know, for this to matter. So Ken, large businesses survive within margin. Yeah. Large businesses can survive with these, you know, razor thin margins. You know, we see it in big construction companies, big restaurants, you know, they’re single digit gross margin numbers, but you know, gross margin, if you have 5% gross margin on $100 million, that’s, you know, us $5 million in gross margin. But most of the businesses we’re dealing with, you know, they don’t have that. So large businesses though they can survive on these razor thin margins for sure. And they can make really good money and great returns to their shareholders. It’s certainly possible we’ll small businesses, generally survivors, their gross margin is less than 15% generally.
That’s the number I threw up people and you know, it’s not a, it’s not a catchall number, but I can just tell people from my experience with businesses that have less than $10 million in revenue, I have not seen a single business survive with, you know, survive. Well, I don’t mean, you know, just barely get by. I mean, where the business is thriving and the owner is making reasonable profits. I have not seen one single business, you know, my two decades of working with small businesses, I haven’t seen one a work well with less than 15% gross margin across every single industry we’ve dealt with. Edmonton Business Consultant, it just tends to be, you know, too little of that, a gross margin, you know, they can never overcome their overhead expenses there. There’s always overhead expenses, although they don’t directly related to the job. You know, they do go, they do go up to bigger.
The business gets. So, um, you know, the problem is, you know, a lot of these business owners, they start looking up with the big construction guys have, you know, you’re a general contractor and you find out that PCL is making 4% on it and they think that they can make 4% on a job. It’s never going to work. Um, you know, the gross margin has to be significantly, it has to be hired in a small business because there’s, you know, there’s less economies of scale. So do customers often value, um, complete and on time more than perfect? Yeah. Yeah. The, the, they will, I mean, that’s, that’s one of the things. So you have to look at the things that we can do in the small business. You know, what can we, what are the differentiators that, uh, that we can add that we can add to that gross margin.
You know, the big guys will struggle because they’re trying to capture such a large percentage of that market share. Um, you know, but the smaller guys can be really differentiated. And get them to the exact solution that the the customer wants and they can get that increase margin for sure. So our admin staff, often a large component of the overhead expenses. Generally when we get down to that, you know, Edmonton Business Consultant have that gross margin. Now we’ve established that we actually have the right gross margin and it’s a margin, you know, north of 15% or north of that that we actually have a shot at. Now we have to go into the components of the overhead expenses. And then generally we have to look at the admin staff because for most small businesses, there’s a couple of items in the overhead, uh, that matter, you know, significantly more, you know, the interest and bank charges in the phone expenses, they’re never going to amount to much at all.
But those admin staff are often one of the largest, if not the largest component of most small businesses in terms of what their overhead is. So, you know, after we make our gross profit margin, we have to pay these overhead expenses before Edmonton Business Consultant compare ourselves. And that Admin, Edmonton Business Consultant, wages is going to be one of the more significant ones. Yeah. So is the physical location of the business often a large part of overhead? Yeah, next to the, uh, you know, the admin staff is generally the physical location. So whether that’s the least that they’re locked into or whether that’s the interest on longterm debt and the principal payments on the longterm ghetto, the mortgage of the place that they’re locked into, the physical space of the business operates out of itself. You know, if it’s not a home business is generally one of the largest components of that overhead expense.
And you know, it’s one of the most significant numbers that we have to make sure we have enough gross margin to overcome that. How long does it take to double the size of a small business? Yeah, so a lot of business owners, they come in and have these, okay. They start working out what their margin is and what their expenses are they doing with their admin staff is, and what their, you know, their rent is. And they start to think, okay, uh, you know, let’s, let’s double the revenue. That’s been my experience that the absolute outliers and the people who are going to double their revenue. We’re talking, you know, the 20% of businesses in 10% of businesses who are successful. And we’re not just talking about the, you know, we remember 50% of small businesses fail. Now. We start talking about the ones that are succeeding.
Maybe 10% of those, you know, if they’re really in that growth phase and they really, you know, they got lightening in a bottle, they got something really good and it’s really cooking a double, you know, to go from a 100,000, 200,000 or 500,000 to a million. That’s Johnny going to take at least a year. I’m like at least a year. Um, yeah. Um, sorry. What if a business needs to double revenue to cover their overhead? Yeah. So then they think of, okay, I’m just going to double it. And they act like, you know, that’s going to happen in a month or two. And they got to remember that even if they’re that outlier, they’re going to go from 250,000 to 500,000. You know, uh, you know, that’s gonna take them a year. So if you need a year, um, you know, to cover that overhead expense, if, if we needed to double revenue to cover overhead expenses, we have to plan that there’s going to be a cash flow shortfall for an entire year and what’s going to be the source of working capital to overcome that.
Um, so generally most businesses, they can’t just say, hey, we’re gonna double that business, then we’re going to double that revenue to cover that overhead expense. A lot of times they go to make some real key decisions and cut some of that overhead expense. You know, they have to sublet some of that space or not choose that space. That’s, that’s so big to begin with or take some of that admin staff and any of you would have to make the tough decision to lay them off or deploy that admin staff on something that you can bill for. Um, you know, so it’s not just as simple as saying, hey, we’re going to double revenue to cover that overhead expense. We have to have a realistic time projection to double that revenue. Um, in on the absolute outliers are the ones that are doubling revenue in a year.
So if you’re planning on doubling revenues next month to cover that overhead, guess what? We’re going to have like cash shortfall a 999 times out of a thousand sites. So why is it important to review your Edmonton Business Consultant numbers every two weeks once you have staff? So once you have staff, you have those significant overhead expenses you have, you know, lots of times that staff is involved in the direct costs. So they’re, you know, involved in, they’re going to determine what that profit margin is that gross margin is and they’re also going to be, can be a component of the overhead expenses. So you really have to drill into that every two weeks because you know, for most small businesses, they’re going to hit their marks sometimes and they’re going to miss their marks. Other times they’re going to spend too much time on projects or they’re not going to realize how significant those overhead expenses are.
A, so once you have staff, I think it’s really critical to review it every two weeks. And I say every two weeks is because most people pay their employees every two weeks. So, uh, you want to review, you know, what’s coming in and what’s going out every, every two weeks, uh, to keep an eye on what those gross margins are and what those overhead expenses are so they don’t get out of hand. And that can be a bit of a turn from when you’re a solo preneur. A lot of times a solo printer can simply look through their bank statements at the end of the month and they can look at their financial statements at the end of the year. Um, and that a lot of times can give them enough information to, you know, to, to move forward. But as soon as you have staff, those numbers can fluctuate wildly. Um, and if you’re not keeping an eye on them, you know, if you’re only looking at them once a year, I mean, the business can be out of business in that year. So looking at them every two weeks is probably the, uh, the ideal once you start to have staff. So I think that’s what we have here today. Thanks so much for tuning in. We look forward to any comments that you have so Edmonton Business Consultant can respond back and use your, your Edmonton Business Consultant feedback for future videos. As always, you know, please hit that like and subscribe button. So we continued delivery tips on how to beat the odds of business. Thanks very much.