Small percentages can be beautiful and lead to big numbers

 

 

Tesla chief executive Elon Musk recently announced a 6% cut in the company’s workforce. This was in addition to a 9% cut in June last year. Tesla had increased its workforce by 30% in early 2018 to boost production, but the car sales it had anticipated did not materialise.

Often, it is better to take a series of small steps to boost revenue or profit than one giant step. For example, if a business increased its revenue by 3% each month over the preceding month, revenue would double in two years.

This is calculated using the rule of 72, a formula used to determine the number of years required to double the amount of money invested at a given annual rate of return. It’s also used in investment calculations when looking at the benefits of compound interest.
The formula is as follows:

Years required to double investment = 72 ÷ compound annual interest rate

So, if an investment promises an annual compound interest rate of 9%, it would take about eight years to double the money invested (72 ÷ 9 = 8).

The rule also works for cutting costs. For example, if a business reduced its expenses by 2% each month over the preceding month, expenses would halve in three years, or 36 months (72 ÷ 2 = 36).

Three factors influence a business or professional practice’s profits:

  1. Revenue
  2. Costs
  3. Processes (productivity)

Improving any or all factors by a small amount, month after month, can create an exponential improvement in profitability, cash flow and business valuation.  For example, if a business turning over $100,000 per month increases its revenue by 2% per month (on the previous month), sales will double to $200,000 per month in three years. Assuming a 30% gross profit margin, an additional gross profit of $30,000 per month is generated. If $25,000 of this flows to the bottom line then an EXTRA $300,000 results. If the business is valued at three times net profit, then the capital value increases by $900,000.

The ability of most small business owners to implement significant change is restricted by time, cash or staff resources. In addition, many big changes are risky, as demonstrated by the Tesla example. If you are unclear where to start in terms of implementing small but effective changes, a fresh pair of eyes and a different perspective on business operations will provide clarity on what to do to turn a good business into a great business.

I help small business owners gain clarity on the way forward. Email me at bryan@bryanworn.com.

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