When percentages rule

by Adina Luca, September 19, 2016

Here’s the scenario: your business is a knowledge-intensive professional services company. Let’s say you teach whale-spotting skills to corporate employees in London. Either you employ specialised staff or you outsource delivery to them. As part of the service you need printed materials, such as whale-spotting books and checklists. What lies at the heart of your business, however, are the finely-honed whale-spotting skills of your staff, which they pass on to your eager clients.

Your in-house printing costs are currently £4,000 a year (paper and cartridges). That’s the equivalent of £0.03 per printed page, which is probably less than what an outsourced supplier would ask for the same job. And you’ve actually managed to bring that cost down significantly: last year it was £6,000. So it’s a no-brainer: an easy decision to carry on printing in-house. Your business can easily afford £4,000 a year, can’t it?

But absolute figures don’t necessarily tell the story. Percentages do.

When you do the maths, it turns out that £4,000 spent on printing represents 1% of your total annual revenue. And that happens to be precisely the same percentage you budgeted to spend on the training that will keep your staff at the cutting edge of whale-spotting expertise.

So, depending on how it’s being used, 1% of your revenue can mean different things.

Might you not want to go back and have another look at the possibilities for outsourcing your printing, in case there’s a cheaper deal available? That way you could free up more of your budget for staff training.

Here are some examples of percentages that make a difference for your business and tell you that something is amiss. Note that they’re all applicable to a professional service business:

More than 50% of revenue is spent on paying your staff to deliver the service. If you’re paying your staff well and you wouldn’t get the same quality at a lower rate, fair enough – but in that case it’s your pricing you need to adjust.

More than 1% of revenue is spent on financing costs – mainly interest payments. If that’s the case, and you are profitable every month, you’re not managing your cash properly. You’re over-relying on your overdraft facility so as to avoid the nasty but necessary business of cash collection.

More than 5% of revenue is spent on renting your office, excluding rates. Can you really afford an office space that eats up such a significant chunk of your revenue? Shouldn’t you look for a cheaper option?

Less than 3% of revenue is spent on marketing. In that case you’re over-relying on direct sales and you’re not doing yourself any favours when it comes to brand communication and promotion. It may be working alright at the moment but you’re not taking full advantage of possible incoming calls that can result from well-targeted marketing activities.

More than 5% of revenue is spent on IT maintenance. Check your contract, but also, more importantly, brush up your own IT expertise so you have a clear picture of what you’ve been paying someone else for. You might then see there are savings to be made.

Frequently we end up in discussions with business owners about whether they should know the details of their expenses. “Why should an owner know what the office cleaning bill is?”, you might ask. Reducing such a bill won’t increase your profits dramatically. However, the percentage of total revenue the cleaning bill represents can give you a revealing picture of how your resources are being spent and how much scope you have to offer discounts or hire new people.

Knowing these percentages, no matter how trivial they might at first appear, can help your decision making and show you whether your cost structure is working for you or against you. Using percentages when you analyse your costs will help you protect your profit margin. So next time you look at your year-end numbers, run percentages around your cost categories and start checking. You might be surprised…

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