Numbers can make a BIG difference in a small business
Turnover from $1m/year with an EBIT of -12% to $1.8m and 15% EBIT!
The Queensland State Government funded Gibsons to assist a small manufacturing business with a business review in order to outline a clear path to growing sales and identifying the key areas to improve profitability. At the time Gibsons was engaged, the annual turnover was around $1M/annum with an EBIT of -12%. The business was cash neutral.
The business review highlighted some major strengths and some key issues that needed addressing urgently.
Key strengths were:
- A small highly-skilled production team.
- A group of satisfied and very loyal customers.
- Technical understanding of the owner was quite high.
- Pricing was found to be very elastic in that customers were not sensitive to price.
Key Issues were:
- Little or no understanding of costs in estimating.
- No review of financial performance.
- Poor financial performance over the past three years.
- Owner only taking a very modest salary.
The strategic review further highlighted that customers highly valued the products provided as well as the service given in delivering those products, and whilst the owner was very passionate about the business, he wasn’t earning a good living and wasn’t able to fund growth.
Detailed analysis of the causes of this profitability issue centred around costing and estimating processes relating to new work.
A plan was put together which highlighted the key areas needing action. They included:
- Developing and implementing effective costing and estimating systems.
- Defining and establishing administration support to better support the owner.
- Developing regular accounts and financial performance review processes.
Over the next three months a costing and estimating model was developed and implemented. Staff were trained in its use and, in keeping it up to date as raw material prices, labour rates and overheads changed.
Administration staff were trained in supporting the owner more effectively so that he could focus on sales, estimating and overseeing production.
Monthly review processes were established where business and financial performance was reviewed, and actions taken as needed.
Within a very short timeframe the business became profitable and in the next full year the business achieved 15% EBIT to sales performance on a turnover of $1.4M. The owner was able to take a market-based salary. Gibsons continued to support the business as necessary as that level of performance continued.