My wife is a third grade school teacher. She specializes in math and science. I could go on and on about the ills of our country’s education system, as I watch my wife do battle on the front lines day-by-day. But, when it comes to education, everyone has an opinion and most have no idea of what actually happens minute-by-minute, day-by-day in the actual classroom where the teaching (or babysitting) is taking place. As my wife implements the curriculum (which is roughly 90% of the problem) that she’s been ordered to administer, she finds opportunities to revert back to basic math, as she feels this is a better way for her students to truly grasp the importance of the subject. Those magical moments when a third-grade student actually grasps the concept of multiplication and division are most often found when she’s involved with them in a basic math exercise not when she’s administering the new “conceptual” math curriculum.
The point of all this is to emphasize the importance of basic math skills, not only as they apply to daily life, but mostly as they apply to running a successful business. Donald Cooper, a management consultant and business guru from Canada, spoke of the importance of basic math skills in his recent newsletter (go to www.donaldcooper.com if you’d like to receive it). According to Cooper, if “you don’t understand your numbers, you don’t understand your business.” He couldn’t be more accurate.
The “numbers” of your business will ultimately be what makes or breaks you, not your ability or “artistry” to repair a vehicle. Sorry to be so mundane, but those are the cold, hard facts. One example from the Cooper newsletter really strikes a chord with me, because he cites the misinformation of a trade publication and its effect on “gullible” independent pizza shop operators who “will believe this bad advice and make bad decisions as a result.” The example involves simple profit increases and how best to go about earning them. One trade publication serving the $32 billion pizza industry advised their readers that, in order to achieve “a quick $100 profit increase (to an operation that earns 10% net profit after taxes), it’s easier to eliminate $100 worth of expense than it is to sell an extra $1,000 worth of pizza.”
To that, both Cooper and I say “Bulls*~t”! A quick exercise in simple math reveals that a sales increase of $194 may be all that’s necessary to achieve the desired profit increase of $100 (assuming the basic cost structure stays intact for the additional sales volume). Here’s how: Using a direct product cost of 35% of every sales dollar (the standard for the pizza industry), the contribution to cover all overhead and profit would be 65%, or .65 cents of every sales dollar. If all overhead costs have already been covered (and, this is key) by virtue of typical sales volume, then an increase in sales of just $194 would yield the necessary, after-tax profit of $100 [($194 x .65) x .80]. The calculation of .80 represents a tax of 20%. So, the trade publication was wrong by a factor of five based on the overhead assumption made above!
But only you know (or should know) your business well enough to make that overhead extrapolation. If you’re unable to calculate the overhead costs and the point at which they become fully covered, then of course you can’t make the necessary calculations to achieve the results as we did above. This all points to the need to have a keen sense of simple mathematics in order to make the correct and most profitable decisions for your business. With everything in place (i.e., building, rent/lease/mortgage, labor, capital equipment, operating expenses, etc…) and all expenses and costs properly accounted for, it’s most often better to seek an increase in sales than a reduction in costs as a way to contribute more net dollars to your bottom line. In many instances, increasing sales by a mere 5% (using the same selling price) could increase your bottom line by some 30 to 40%. It’s all about leveraging your existing cost base, which is a fundamental business principal practiced by the most successful business owners. If your child were in my wife’s third grade class, he’d know that!