I’m lucky enough today to have a guest post from my friend and the management accounting expert to my business, Ben Didier. Rather than spoil the show, I’ll let his post do the talking.
Can we afford it?
One of the biggest jumps that often shock people when moving from employed work to running a business, is the shift in thinking about spending. In everyday life if we want something; an ipad, a new TV, a holiday, then we look in the bank; if you have the money then you can, if you don’t then you can’t – simple (or you can borrow or save up).
Spending in business works in a fundamentally different way, it is not about what you want, it is about what that spend will give back financially. What is the Return on Investment (ROI)?
The business owner or director may often ask finance: Can we afford a new sales person? I would advocate looking at the situation in a slightly different way and ask:
“What do we need to do to be able to take on a sales person?”
If a new sales person can bring in more than they cost each month (to be fulfilled by the existing team) then yes, it’s a good move.
In practice there is more to it; sales people generally take a few months to build up a pipeline of work so the business effectively pays the salary for no return at the start. Then there are additional cost of travel, communications and IT, not to mention the extra delivery capacity required if none is spare.
It many not be more sales directly, perhaps better IT or a new administrator means you can turn out more work in a month.
If for every pound you spend on marketing you get back two pounds of additional gross profit (income after raw materials) then that is money well spend. Contrastingly buying a gold-plated chair for your office because you like it, is not going to pay you back much.
The fun part look looking at projections – amounts and time scales. If you need an extra £5k per month in sales to cover costs of a new sales person, then you need to ask some questions:
Can your business handle the extra work?
How many more production people would you need?
How long would it take to build up to that level of extra sales?
Can you fulfil it with your current equipment and office space?
Is there the cash in the bank to pay the salary for 3 months with no additional sales?
At what point do you expect to break-even?
Ask yourself “What if…”
If your top current salesperson finds 5 new clients per month, then expecting a new employee to get 10 per month would be ambitions, but 2 per month should be easy. That is the kind of situation-modelling that can help shape your expectations, allow you to take considered risks, and monitor progress in an informed way once you have made that investment.
It doesn’t always work out, but if you have thought through the risks, then at least you know the company can still continue if it doesn’t.
Photo courtesy of http://www.flickr.com/photos/karola/