BAM Day 1 - The numbers won’t speak for themselves! with Jim Rayner

Okay, I've talked for long enough and you've got lots more of me. But we have a really special guest speaker. In fact, his name's Jim, Jim Rayner. I've known him since, interestingly, I first met Jim in October 1998 because he was at the same masterclass as me. I met Steve pipe in November 98, who changed my life. Jim was at the same event. I've been in touch with Jim ever since. Jim is. He's just. He's a chartered accountant, but he's also a very clever man. He's a genius with spreadsheets. He's a genius with statistics. He knows how to. He's the expert in how do we present information to our clients so it's more meaningful. So I kind of made a hash of that with my session earlier with the graphs and the charts and the ratio analysis. But let me now bring somebody who is much, much cleverer than me. And Jim's going to share. Hi there, Jim, are you there?

Hi. Thanks very much for that introduction.

You're good to go, Jim.

Okay, thank you very much.

Shall I shut up and leave it to you?

Yeah, that's fine. Thank you, Mark.

Okay, I'll see everyone in half an hour.

Brilliant. Okay, a couple of quick announcements before we get started. The first is that I'd love to answer questions, but it's quite a short session. So if you've got any questions, if you put them in the Q and A box, I'll endeavor to deal with them after we're done. Second thing is there is a workbook for this session which is separate from the main one that Mark's talked about. It's interactive. You'll be able to play with it. I think Sarah's going to give you the link to that. When you open it up, you'll see that at the moment most of it is hidden. When we get to the very end of the session, I will unlock it so that you can. Can play with it. And that will be available for, in a week or so for you to experiment with the models that we're going to look at. So, first of all, who am I? I'm a British accountant. I've been doing accountancy since, I don't know, sort of shortly after the end of the last ice age. Well, 1978, when I left university.

And I guess I'm probably beginning to get the hang of accountancy now.

I'm unashamedly a numbers man. I have a degree in maths, so numbers are sort of very much my thing.

But I think the thing that really excites me about this and why I do business advisory work is that I enjoy explaining numbers to people who may not be natural numbers people. Many of our, when we start doing business advisory work, you know, we come in as the numbers guys and many of our clients are not natural numbers people. They may be, they may run great businesses, they may be technologically technically brilliant, great on entrepreneurs, run, really good at team building, but not natural numbers people. And our role I think is to sit alongside them and to help them understand the numbers, particularly to understand and feel comfortable with the numbers of their own business. When I started in accountancy, there was a sort of general feeling that what we were doing was some kind of dark art and the secrets really shouldn't be explained to, to the hoi polloi. So I think that's entirely the wrong, wrong approach. What we should be doing is using our skills to help teach, train our clients, allow them to get used to their numbers, to play with them. Because when we do that, they're going to value us more. We're going to find that they use our services more when they realize exactly what we can do for them.

When we're doing business advisory work, we face. Well, Mark's talked about a number of the challenges we face. I want to raise two more. The first challenge is that very often our clients don't believe that we understand their business. That's a big subject and, you know, one for another day. The second challenge is that our clients are not, as I say, in many cases, they're not natural numbers people. I've had clients who were really good. I mean, I think of one particular client, they made bespoke joinery, really high quality, high quality kitchens that they made and installed for clients to two partner business. One was great at marketing and one was great at joinery. Neither of them were particularly.

Would particularly describe themselves as numbers people.

And the challenges that we face are that if we're not careful, we're sort of coming at each other from different directions. We've got people who are really good at their business and they doubt whether we understand it and, and we've got a bunch of skills, our skill with numbers that they don't immediately gel with. So let me give you, give you a story. I know we're supposed to, you know, presentations like this, we're supposed to give stories about our successes. This one's actually a story of not quite abject failure, but failure.

First part of my career I worked in, in practice, then I moved over which is when I met Mark. I made myself ill through overwork and after that sold my practice and moved into commercial environment. I worked for a couple of firms as solicitors, running their finance teams, and then latterly, for an advertising company. And for the last five years I've been doing business advisory work, price consulting, that kind of stuff.

So this, this is a story. I'm sitting in the boardroom for Affirmative Solicitors. I'm going through their monthly accounts. I've also done some forecasts, but I start off going through the monthly accounts.

And the forecasts I know have a fairly tough message.

So before getting to that, I finished doing the first part, finished going through the monthly accounts. I want to make sure that everybody's on board with what I've talked about so far before we move on to the tough message.

So I make what turned out to be a mistake and I say, you know, is everyone happy with that? Are we all.

Or sort of understand what's going on with the numbers so far?

And one of the partners in this firm, very intelligent solicitor, turns to me and says this.

Jim, the thing is, if all you've got is a hammer, you see every challenge as a nail.

And all you've got is numbers, and you see every challenge as something that's going to be tackled, ought to be tackled with numbers. But there's a lot more to our business than that.

Did he have a point? Well, I suppose, yes, he did. There is. Businesses are not just about numbers. There's a lot more to it than that.

If you imagine for a moment you're running a business.

Not an accountancy practice, you're running something else. You know, maybe you're, you know, you're making cakes, you're building furniture, you're doing something you're really proud of and it occupies most of your waking thoughts, maybe some of your sleeping thoughts.

And it's.

Very much, you know, your baby, you're proud of it. It's something you work, you think about, think about a great deal. And along comes this accountant and he reduces it to a set of numbers.

Set of dull, lifeless numbers. You're going to feel a bit put out.

That's the kind of challenge that we face when we're trying to communicate the importance of the numbers to our clients. Now, in this particular instance, we. The message that I had for these solicitors was an important one.

What the numbers showed, the forecasts that I'd done showed that three months down the line there was a real danger of running out of money. So what I wanted to say to them was, if we don't take some action now. And I've got some suggestions about what those actions might be. If we don't take some action now, three months down the line, you guys are going to have members of your team banging on your door saying, hey Mr. Partner, why hasn't my salary been paid?

So the numbers are, I mean, I'm talking to a group of accountants. We know this, the numbers are vitally important.

And we need to have ways of getting that through to, through to our clients.

So let me, let me give an example of how we might start to.

Communicate numerical information to a client. This is a real life example. I've changed the numbers to make them a bit easier. But.

A, one of my clients came to me and asked me a series of questions. So let me sort out my screen and I'll try and share this with you.

Give me a moment.

Right, so you should be able to see this on screen. So this guy, his name wasn't Frank. But all examples have to be, have to be called Frank because it's easier to remember, remember the name. So Frank's considering growing his business by recruiting a salesperson because he's identified a new market that he wants to exploit. He estimates it'll increase his sales by 72k. Obviously it's going to be some extra costs, salary, commission, some fixed costs. So the three questions he has for us are.

How much extra profit is he going to make.

What'S the break even point? And how much margin of safety does he have if the salesperson fails to deliver the expected sales? We've got his existing numbers and we know his current gross percentage is 60%.

So there's a few ways you might tackle this question.

I don't know what your immediate thought is on the best way to tackle it. Let me suggest two ways that I've seen it done and probably been tempted to do it this way myself in the past. First thing is, first method you might approach is, you know, you're sitting in the meeting, client asks you the question and you pull out your calculator. You think this is not a particularly difficult calculation. I can do it on a calculator, a piece of paper or whatever and give him the answer.

So you know, the, you know, the approach here is that he's got some extra, extra fixed costs salary, 24, fixed costs of for 5, so it's 29.

We know that his existing gross profit is 60% but he's got commission, so he's only going to make 55% on the new ones. So what sales does he need to achieve in order that 55% of it comes down to £29,000?

So what you could do is you could quickly answer it. You could do it in the back of an envelope and look frightfully clever.

Is that a sensible approach to tackling this question? I don't think it is for a few reasons. First of all, you know, it smacks a bit of showing off.

Is your client going to talk to his friends later on and say something along the lines of, my accountant's really clever? I asked him this question and he pulled out his calculator, his abacus, his slider or whatever and gave me the answer straight away. I don't think he is.

Because as I say, I think it just smacks of sort of showing off. But it's not particularly helpful. We haven't given the client any, any clue as to how.

The calculation might differ if these numbers were slightly different. Chances are that.

Frank is also considering what to do. If he has a lower base salary but a high commission rate, or maybe the other way around, he might be thinking there's some extra fixed costs he might want to put in. He might think the 72,000 additional sales is optimistic and want to bring that down.

And by doing the thing on the back of an envelope, we've really given him no pointer as to.

How to think through the problem and make the right decision.

Second approach that we might take is to say to ourselves, ah.

First method doesn't work because we've given the client something really valuable, but we haven't done anything to show him how valuable it is. We've just jotted it, done it very quickly on our calculator and there it is, it's gone. He's got no record of it.

Really very difficult to charge him for giving him this valuable advice. So what do we do? We go away, we pull out our spreadsheet, maybe do sort of three different examples and then we put it into a Word document, we produce a three, three page report.

And.

We send them off, send that off to our client.

Is that much better than the first method? I'm not convinced it is.

Because.

We'Ve got a client here with a real life business question.

He wants an answer to that question. He wants to understand.

How the thing works. What he doesn't want is a three page report which has probably got a few caveats in it. You know, this, this advice does not constitute something or another we accept no responsibility for. And lots of guff about.

Assumptions and all that kind of stuff.

I'm not convinced that that's a great deal better. And turning it into a three page report so that you can send him a bill seems to me to be adding insult to injury.

So having rejected those two, let's look at a different way of doing it. Because my contention is that what we ought to be trying to do is to sit alongside our client, to collaborate with our clients and to help them interact with the numbers, understand the numbers and really get a feel for what's going on in their business. So let me move.

Oops, that's not what I wanted to do. Okay, so what I've done here, and I'm going to have to move myself out of the way.

I'll hide over that side of the screen.

Frank's probably going to want to consider other options. So what we've got here is the ability to change those options. So we change the salary, change the commission rate and below we've got, got the results. So the first column is what is what his results were before. I haven't shown those to you before but you know, those are the, those are numbers. Then we've got the.

Additional, additional stuff. So we've got an additional 72,000 sales.

We'Ve got additional variable costs, we've got the commission, we've got the extra fixed costs and the extra salary. So on the face of it, we're going to make 10,600 additional dollars from employing this salesperson.

But Frank's going to probably want to look at other options. So he might want to change that 24 down to 20 and maybe increase the commission rate to 5.5%. What does that do? He might have concerns that 72,000 is.

Too optimistic.

So what we've got now is we've got.

The numbers have changed over the right hand side. We've got additional sales of 70, additional profit, break even point is $45,872. So if he sells that much then on these assumptions he would, the additional salesman would, would just pay for himself. No extra profit, no loss. And our margin of safety is 34.5%. So that's just the difference between the 70,000 predicted sales and the break even sales reduced to a percentage. So what we can do now is we can start to sit down with our client. You could even do it on a zoom call and play around with these numbers and allow him to get a feel for.

What the business looks like with trying out these different options. I put a graph at the bottom as well that also changes when the numbers alter.

So this will be in the workbook that will open up at the end of the session. So you'll be able to play around with this and see the kind of things that we ought to be trying to do with our clients in order to help them understand the way business is going.

Right, so let me go back here.

What I want to do now is look at a second example.

Really staying with the issue of break even.

The situation we're in at the moment and have been for the last couple of years, is that there's a great deal more uncertainty about business than there has been for a number of years. One of the biggest uncertainties is levels of sales. And.

I work with, or have been working with a number of businesses in the hospitality industry, pubs, restaurants, that kind of thing. And in the UK we had a period of time when they just weren't able to trade at all. Actually that's not strictly true because a lot of them did start doing takeaways but they couldn't have people on site to, they couldn't sell to people coming into a restaurant, sitting down, having a meal, that kind of thing.

So the sales really.

Completely nosedived.

In situations like that, break even really matters considerably.

One of the key ratios. Mark's talked a lot about ratios in the earlier part. One of the key ratios for looking at a business's health is what's called the break even ratio.

And it's a measure of how close the current levels of sales are to the break even point.

In my experience, businesses, business owners really don't tend to. Very few of them tend to grasp the principles of break even. I think there's a couple of reasons for that. One is a fixation with concentrating on sales.

The sales value.

Particularly in a. I've been working in a.

Working in an advertising business and one of the key things that they get very excited about is what is the top line sales figure. They have a sales team and the, you know, the sales members of the sales team are all very excited about what their sales figure is and how it compares to everybody else.

So in many businesses the sales figure is the one that really commands attention. I'm going to suggest that what we really ought to be looking at is the net variable margin, the gross profit. Because if you think about it, what a business needs to do in order to make profit is produce enough gross profit to cover its fixed costs.

And it doesn't really matter what the level of sales is, provided it's got enough gross profit to cover that. Those to cover the fixed costs.

So that's the first reason why I think businesses don't tend to, or few businesses understand the concept of break even.

Second reason is that I think it's often explained rather poorly and we've sort of taken academic texts and expect.

Non academic people to understand them. So let me share my screen again.

Right.

I think I'm over the right, right side of the screen this time. So let's look at a simple model. We've got a business that sells a thousand units, a thousand units of something. Each one is sold for $750. We've got variable cost per unit of 500, so the margin per unit is $250.

And then we got fixed costs of 200,000.

And then on the right hand side you can see what that works out at in a sort of summary. P and L count. Then I've put in a graph which sort of shows the traditional way of explaining break even. So we've got a number of lines on here. The black line is the sales figure. So along the bottom we've got the sales volume. Black line shows the sales figure. The blue line is the variable cost figure. So if we sell nothing, both the sales and the variable costs are nil. Then we've got the orange horizontal line is our fixed costs.

And then what we do is we add the fixed costs and the variable costs together to create the green line which is the total costs. My apologies for anyone who's colorblind. I really should have thought this graph through better before producing it. But.

There'S a couple of problems with this.

So just to say that the break Even point is 800 units, which is the point where the sales line crosses the total cost line.

I think there's a couple of problems with. Actually there's three. One of which is not deliberate, and that is that the X axis for some reason doesn't start at zero, that this axis line here ought to start here. But for some reason it doesn't. And I apologize for that. That's my fault.

I think for somebody who's not numerically trained.

One of the big problems with this is that the concept of adding two lines together.

So adding the orange line and the blue line together to get the green line is not intuitively obvious exactly what's going on.

So I think that's one problem. Second problem is that as I say, it concentrates on sales.

And.

The difficulty there is that if you start trying to increase the sales volume.

Almost certainly you are going to be making changes to either the Cost structure or the sales price.

So the idea that these are straight lines.

Is in most cases not true.

That means that we've got, you know, we've got a very confusing, confusing situation going on, which is very difficult, I think, for our.

Our, I'm going to say numerically challenged, but somebody who's not a natural numbers person to grasp exactly what's going on. So let me move on to what I think is a.

Better way of. Whoops, that's not what I intended to do.

So what I've got here is what I think is a clearer explanation. So what we're concentrating on here is just two things. We've got gross profit and we've got fixed costs.

So what we need to do is create enough gross profit to cover our fixed costs. It's really that simple.

And.

We can then start experimenting with the different assumptions that we've got. So we can, we're changing the unit sold. Doesn't affect, that, doesn't affect the chart. It will affect the, the, the table underneath. But we can change the, change the sale price.

And if we do that, you'll see that the chart alters. We can change the variable costs. We can change, change our fixed costs. Let me reset them all.

Then below.

What we've got is the, we've got a summary P and L account.

And then over the right hand side we've got some key ratios. We've got the gross profit percentage which Mark talked about not long ago. We've got our break even point calculated. And then I've got our gross profit and our fixed costs which gives us what's called the break even ratio. The break even ratio is simply fixed costs divided by gross profit. And what it tells you is how close you are to.

Start that sentence again, what it tells you is how much business, how much sales volume can fall before the business starts losing money.

So our fixed costs make up 80% of our gross profit, which means that sales volume can fall by 20% before the business starts losing money. That's a really critical thing to know in order to understand the health of a business. Over the left hand side I've put an interpretation of the break, break even ratio. So if it's over 90%, the business is in a really perilous state because it only needs to lose 10% of its sales volume before it starts losing money. And in the current economic climate, you know, throughout the world, that is, you know, 10% is, is, is really quite.

Quite a small number when you look at the uncertainties that we're facing.

In business today, 80 to 90%. I'd be worried about 70 to 80% probably safe and under 70% robust. But as always with these ratios, the thing to look at is the trends. Is it getting worse? Is it getting better?

Members of Mark's Value Pricing academy will be getting a new software tool based on this which you can use to engage your clients with a break even point and the break even ratio for, for their businesses. I hope to get that finished and shipped over to Mark next week or so.

So.

What I want, want to do, be able to be able to do. This is one of a number of tools that VPA members get and this one in particular is designed to help you show your clients where they're going with the business and help them to understand and engage with the numbers.

Okay, so I've got three minutes left. So.

I think.

As I say, I think our task with business advisory work is to help our clients understand the numbers, to really train them to.

Feel comfortable with the numbers. And we can do that a number of ways. I think.

One of the things that modern software allows us to do, and you could do some of this with Excel, it takes a little bit of work, but it can be done.

As long as you don't frighten your clients. With Excel.

One of the things we need to do is to incorporate, not just show them the numbers.

So you can do that in a number of ways. You can have just a table of numbers, you can put it into a chart.

You can put it into words because different people.

Respond to messages delivered in different ways. But a couple of really powerful things that you can now do with modern technology is to incorporate interactivity so that you can sit down with the client and they can, and you can do this online or face to face, you can sit down with a client and they can actually experiment with the numbers, use sliders and that kind of thing to change the numbers and really get a feel for what's going on.

And I think the other key element is collaboration. So with really the purpose of business advisory work is I think for us to collaborate with our clients to help them to make better informed decisions, make better decisions, quicker decisions, to grow their businesses and to make more profit. And with that, Mark, I think I'm done. So the next few minutes I will unlock the bits and of the bits of the workbook that you can't see at the moment. So if you just, if you've, if you've followed the link, if you refresh it shortly, next five or 10 minutes, the rest of the stuff will be. Will be revealed, and you'll be able to play and experiment with it.

Thank you, Jim.

I'm done.

Thank you. That was awesome. Thanks very much.