Do the Math Upfront

Free e-Book 35 Ways to Increase Profitable Sales Click here

 

Logo_Black_no_URL__cropped_021012.jpg

Do the Math to Make Better Business Decisions

I have a saying that I am prone to repeating often:  "The math is always the math."  It is the quantifiable version of "the facts are the facts, like them or not."  Both facts and math are essential to running your business and you would be surprised how many business people run their businesses without them.  Managers inside large corporations can be as guilty as solo entrepreneurs.

To illustrate my point, let's say you're a massage therapist charging $70 per for a 50 minute hour and you perform your service in your customer's home or place of employment.  How many hours per week would you have to work and how many massages would you have to perform per week to make the same amount of money as if you had a $50,000 per year job with health benefits and a two week vacation?

The answer IS NOT $50,000 / $70 / 52 = 14 hours and 14 massages per week.

There are some other cost and time components to consider such as:

  • Time to and from each client
  • The set-up and tear down time at each client
  • Administrative and marketing time
  • Administrative, marketing and self employment tax expense
  • Cost to travel to and from each client
  • The cost of health insurance

So let's make some assumptions:

  • It takes you an hour per massage session to travel to and from the client's location and set-up and tear down your equipment.
  • It's an average 10 miles round trip to and from each client and it creates .55 per mile in expenses such as gas, maintenance, wear on the vehicle and loss of vehicle value.  This is $5.50 in costs per appointment.
  • It costs you $7,800 per year ($150 per week) in supply costs, marketing costs, administrative costs and self-employment taxes.
  • It takes you four hours per week for administrative, marketing and networking tasks.
  • It costs you $4,680 per year ($90 per week) for a health insurance policy.

Now let's do a little math.

  • To make a $50,000 salary equivalent, the revenue need would be $50,000 + $7,800 + $4,680 = $62,480.
  • The net revenue per massage after expenses would be $70 - $5.50 travel = $64.50 per massage.
  • The number of massages necessary would be $62,480 / $64,50 / 50 = more than 19 massages per week.
  • The time necessary 19+ hours for massages + 19+ hours for travel and set-up + 4 hours for admin/marketing = about 43 hours per week.

So far, so good.  So now the question has to be, is it reasonable to be able to consistently have 19 clients per week, and is it reasonable to be able to schedule that many clients to meet your schedule and their schedules?  My guess is that it would be a challenge to create a business like that and certainly not one that could be built overnight.

The point of this exercise is to start you thinking about the viability of your business decisions and there's no substitute for doing the math upfront to increase the chances the outcomes of your decisions will be as you intended.  So some simple questions:

  • What is your business's or product line's breakeven unit or dollar volume?
  • What is the profit level you would project from your current business, pricing or marketing initiatives.
  • How much additional business would it take to justify an investment in your business - equipment, personnel or marketing?
  • How much cash do you need coming in every month so that you don't find yourself with cash flow problems?
  • How many days of inventory do you currently have on hand?
  • How many days does it take to collect your accounts receivable?
  • What is the dollar value of accounts with balances greater than 60 days old?

These kinds of questions are just as essential to the operation of your business as the questions above the massage therapist would need to answer to understand his/her business.  If you don't have the answers to the above questions, you might consider obtaining them today.  You'll make more money and have less business risk.

If you would like a downloadable copy of this article, click here.