Planning For the Best, Protecting From the Worst: John Knight

No one knows what’s around the corner with the Australian economy, but instead of planning for the worst and hoping for the best, Business Depot CEO John Knight suggests doing things a little differently.

The real estate agencies who are ahead of the game are already looking to the future and are scouring their business models to identify strategies they can use to reduce various risks, particularly the risks posed by the broader economy. They are still playing a positive game, just not being ridiculous with their investment in growth.

With that in mind, here’s what you can do to shore up your own future success.

Perfect year: The profit potential
Simply look at the last five or so years, pick the best bits of each one and merge them together into the ‘perfect’ year. For example, your average rate of commission in 2014 may have been 50 per cent – the best it’s been for you – so apply that to your 2013 level of sale – your best level of gross sales commission. The end result is your profit potential if all the stars aligned for a perfect year.

The 1 percenters: Income formula
Focusing on incremental profit allows you to continuously improve your bottom line by tweaking the different variables in your business. Work out your income formula and consider ways to improve each component of it – even if only by one per cent.

In this example, with the recruitment of a more ‘average’ agent, by increasing production to two sales per month on average per person and lifting gross office commission by 0.1 of a per cent, the annual profit could increase by almost $400,000.

Your actions then should all be centred on each of these three changes to your formula.

Breakeven point: Cash and profit
When you are unsure what’s around the corner, I always default to calculating your breakeven point. This is the amount of income you need to earn in a month to pay all of your fixed expenses and make $0 in profit – a traditional profit breakeven calculation.

I also like to calculate the ‘cash breakeven’ of your business. Your cash breakeven is the level of income you need to derive to make a $0 profit and have enough cash to meet your other commitments like loan repayments, tax bills and owner drawings for living expenses, school fees and whatever else you have committed to.

There’s a reason why bean counters like us love budgets: they are still a great way to summarise and sanity-check your plans

Boring (but useful) budgets
You love doing a budget for your income, but how often do you actually do a budget for profit? Boring, I know, but there is a reason why bean counters like us love budgets: they are still a great way to summarise and sanity-check your plans. The real value, however, comes from undertaking sensitivity analysis on the budget – the what-if scenarios.

Pick a major potential variable in your business and flex it by 10, 20 and 30 per cent to see what impact it has. Summarise all the scenarios and consider which is the more likely result, without being too optimistic. Then put strategies in place that protect you if that should occur; for example, lining up more working capital to get you through a tough patch or buying a rent roll to reduce exposure.

We all want to take a positive view, but experience shows enthusiasm is not enough – you also need to protect from the worst-case scenario.

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John Knight

John Knight is the Managing Director of businessDEPOT, a team of energetic accountants and advisors.