Connections for Success

 

06.08.20

The Most Important Questions to Ask Your Controller Right Now
Chris Arndt

While the economy begins to cautiously reopen after COVID-19-related restrictions, there are plenty of questions and uncertainty for business owners and entrepreneurs. Here are three important questions to ask your controller right now.

What is the Break-Even Sales Point for the Business?

With a number of companies losing money or facing financial hardship, it is important for your controller to tell you what your company’s break-even point is. Profit aside, focus on when you can begin to make money again. Have your controller figure out which expenses you are on the hook for within your reduced spending. Things like rent, payroll and essential operations.

The Break-Even Point for a Service-Based Company 
If you are a service-based company, finding your break-even point is a fairly simple equation. You will need to make enough revenue to equal your total expenses.

Total fixed expenses/average total revenue from billable hours or projects = break-even point

Let’s consider an example where a consulting company has cut fixed expenses down to $500,000 per month. They will need to book on average five projects a month at $100,000 to reach their break-even point.

The Break-Even Point for a Consumer Products Company 
If you sell a product, it becomes a little more complicated, as you have to consider the margin on what you sell. Using the same amount of expenses as in the example above, if a beauty supply business sells blow dryers for $100 apiece, and it costs them $25 to make each blow dryer, for every one they sell they will make a gross profit of $75. To figure out the break-even point, they should take the $500,000 overhead spending they are incurring and then divide it by the $75 to know how many units they need to sell to break even.

Total fixed expenses/margin sold of each unit = break-even point

Keep track of your liquidity, current and quick ratios, and figure out how long it will take to reach your break-even point to ascertain whether you can realistically survive until then.

Related Read: What ways can you improve liquidity? In this financial climate, you must think outside the box to maintain your cash flow. Read more about how your team can get creative with cash.

When can I Rehire my Laid-Off Employees? 

As you move through economic recovery, you will hopefully be covering costs. Piggybacking off the break-even point question, you will likely want to know when you can rehire laid-off employees. One question to ask your controller is:  How much revenue can be generated by bringing that person back?

When to Rehire Employees in a Service-Based Business 
Using our consulting agency example above, once they have signed more consulting work at their average rate of $10K per month, but their core team is maxed out, this should trigger the rehiring process. If they can hire someone back for say $5K per month, it is a no-brainer. Rehiring the employee yields an additional $5K in profit and can cover the additional workload. They now know that they can hire that employee back.

When to Rehire Employees in a Consumer Products Business
If you are maxing out orders, it is time to rehire. Say our beauty supply business is struggling to fulfill orders with their dialed-back team. They should consider that a trigger to rehire laid-off staff. If they pay someone in the warehouse $25 per hour to fulfill orders, eight hours a day, that is a payroll cost of $200 per day. If by hiring that person, they can fulfill another ten orders per day ($750 gross profit) then they are $550 better off than before bringing that person back.

Related Read: A system like NetSuite that offers a live dashboard of KPIs can easily tell you how many orders you’re fulfilling each day to calculate how many orders per person in your warehouse. Read more ways to know whether your product business should make the switch to NetSuite.

Which One of My Sales Channels, Services or Products are the Most Profitable? 

In order to get the greatest benefit from a limited team or resources, ask your controller which of your sales channels, services and/or products are the most profitable right now.

Service Business Profitability 
If you are a service-based business that has cut spending and cannot currently rehire your employees, focus on your most profitable channels and best-selling services to optimize your core crew. Is one of your services easier to sell than others? Concentrate on that channel in the short-term to build back your profitability. If, for example, you use partner channels and can sell more services efficiently with a lower customer acquisition cost (CAC), even if it is at a lower profit, it is a good focus of your resources.

Consumer Products Sales Channel Profitability 
If your consumer products business sells a million units for $1 per unit or 100,000 units at $10 per unit, they both return one million dollars in gross profit. Focus on whichever one is easier to accomplish with your limited team. Find your sales channel profitability by subtracting your cost of goods sold (COGS) and expenses from that channel’s revenue.

Sales Channel Net Profit = Sales Channel Revenue – Direct COGS – Direct Expenses

In a product-based business, most people assume that you always want higher-margin sales; however, if you deal with a high volume buyer, you can benefit from how efficient they are to work with. Even if it is technically not your most profitable margin, it is a good focus of your time in the current market. One of our clients had a better margin with smaller retailers but did not push a high volume. They signed a deal with Walmart and while they charged a fraction of the price per unit, they sold so much volume and Walmart was so easy to work with, our client essentially doubled their sales overnight.

We know businesses have many questions about how to prepare for the post-pandemic road ahead and there is not always a clear-cut answer; however, asking your controller these questions will better prepare you for your economic recovery.

For more information, contact Chris Arndt at carndt@orba.com or at 312.494.7014. Visit ORBA.com to learn more about our Cloud CFO Services. 

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