For contractors who want to grow restoration business understanding financial statements is key. There is some very important and valuable information that can be obtained through several simple comparisons. The two key numbers that every restoration business owner understands is gross revenue and net profit. How much did you make, and how much of that did you keep?
At the end of the year we pour over our Income Statements and those two numbers, one at the very top and the other at the very bottom of the report are the focus of our attention. Most numbers in between these two are a blur to us. So let’s get right at it. How do you assess your business growth performance using these two numbers?
When it comes to growing your business the financial assessment we tend to make first is to compare this year’s gross revenue with last year’s revenue. How much did you increase, or decrease during this past year? If this year’s number is larger than last year’s the tendency is to feel good about the outcome.
A better barometer of business growth is to look at the past three years as a single unit of time. The three-year average does a better job of revealing your company’s growth trend and more accurately shows your current growth trajectory. It helps to normalize spikes in activity up or down to give you a more accurate picture of your growth rate.
If you have experienced an unusual CAT season you may be lulled into a feeling of achievement when in reality you have simply benefited from an anomaly that can’t be counted upon to sustain next year’s growth. Determining your average annual growth rate over a three-year period will give you a more accurate gauge of your performance.
What direction is that trajectory moving and at what rate? Complete this simple gross revenue exercise to identify your growth trajectory. Annualize revenue for 2016 by simply taking the gross revenue year-to-date as of September 30, divide by 9 and multiply by 12. This is your likely year-end gross revenue.
Next, identify your gross revenue for each of the years 2013 – 2016 and follow this formula for each year beginning with 2014 – ((2014 GR – 2013 GR)/2013 GR = %). This is pretty simple math. Subtract 2013 from 2014 and divide by 2013 equals the percentage difference between the two years. This is your annual growth rate stated as a percentage of change for 2014.
For example, if your December 31, 2013 gross revenue was $570,000 and your 2014 gross revenue was $625,000 your calculation is (625,000 – 570,000) ÷ 570,000 = .096 x 100 = 9.6% growth for 2014. Do this for each of the three years, add the percentages and divide by three and you will have your three-year average annual growth rate. This trend is worth evaluating. Do it now and then come back.
Now apply the Rule of 72 by dividing 72 ÷ by your 3-year average to show how many years it will take to double your business at its current average annual growth rate. If your 3-year average annual growth rate is 9.6% divide that into 72 (72 ÷ 9.6) = 7.5 years. So whatever size your current business is at it will take 7.5 years to double based upon your current rate of growth.
If you are doing $500,000 of annual business it will take nearly 8 years to reach $1 million at its current rate of growth. What do you think about that?? Are you satisfied, or not? Are you growing your business at a rate that satisfies you? What can you do to increase the current trajectory?
Here are a couple of examples to consider: My company earned a decade long average annual growth rate of nearly 50%. Applying the Rule of 72 we were doubling in size every 1.4 years. We lived with constant change. The management team constantly grew, new positions were added, new sources of revenue both within and outside the insurance industry were secured. Innovation, adaptability and changed were constants. Another company I know finished 2013 with $345,000 in gross revenue and will close out 2016 with approximately $600,000 of revenue. When the 3 annual growth rates were determined we found that this company grew at a 3-year average annual growth rate of 22% doubling the business every 3.4 years.
Knowing this helps the owner better anticipate personnel, equipment, and marketing requirements over the next several years to sustain or increase revenue growth. Another company has been in steady decline since 2013 when $600,000 was earned. That company will close out 2016 with approximately $400,000 of revenue.
This represents a three-year average annual decline of 14%. At that rate unless something dramatic changes the 2016 year-end is likely to produce $345,000 in gross revenue. If something is not done quickly the company may not survive another down year. A company in decline tends to accelerate the decline year over year and that is true with this company having declined from 4% to 14% to 19% over the three-year stretch.
Now that you have a clearer picture of your growth trajectory and an idea of what this suggests for your future growth trends what changes are needed? These calculations are important to do since there is no seminar or no restoration book that will teach you or encourage you to do them. Take the time to better understand your numbers and your business. Reference: 6 Month Coaching Plan – The Revenue Generator – The Ultimate Revenue Booster for Your Business Sales Growth http://growmyrestorationbusiness.com/plans-pricing-new