All roads lead to ROAM or Ruin

The game of business is to make it easy for customers to buy from you. How well do you and your people in the coffee shop play it? If you started deliveries would you do even better? Or not? To answer the questions, we need a financial scorecard. That’s what this blog is about.

The three most important ones to keep score of are in a model I learned from a guy called Ted Black – a grizzled old mentor of mine during my career in the corporate jungle world. It opened my eyes. It’s a marketing and sales-driven one. That’s why I think it can help us.

But first, step back in time. When you started the business, you used your own money. Maybe, you didn’t have enough so borrowed some. This is an investment. It comes with risk. That means you’ll want a return on your own, precious cash that’s higher than the best of any other choice you may have had for it. It’s a cost and a big one. Work it out for yourself.

The first thing you did was buy assets needed to attract people into the shop you chose. They are physical things like equipment, furniture and fittings. These are fixed assets. Once installed, you buy the products you must have for day-to-day trading. They are current assets – ones that move in and out of the shop fast if you are busy and are doing the right things right.

When you open the doors, three key results are the sales you get, the profit you make, and the cash you generate. Cash is the most important. It’s the lifeblood of any business: is there more cash in the bank on the last day of the month and year than there was at the start? Does it give you the return you want after you’ve paid everyone from supplier to taxman at the end of every month and year?

As Ted used to say to me, “All roads lead to ROAM or ruin!” So, for answers let’s now look at the model he showed me.

Your cash bought assets. You and your people manage them. ROAM means “Return On Assets Managed”. You calculate it as a percent. The three most important financial productivity measures for any firm, huge or small, are ATO, ROS and ROAM. They ask three key questions of you.

The first two link straight to sales. ATO (Asset Turnover) asks: “For every Rand of assets how many Rands of sales do we generate?” It’s an input: output productivity measure. The first and most important one for any business. In time you’ll see why.

After you’ve made a sale, ROS (Return-on-Sales%), asks: “How many cents profit in the Rand do we make?”

There are several profit numbers on an income statement. They go from Gross Profit down to Profit after Tax. Don’t use them. Instead go for Cash profit. It’s real, not fudged by accountants. The cash is in the bank, or it isn’t.

Lastly, multiply the two answers to get your ROAM%. This leads to the last question: “Is the ROAM% high enough to make a Cash Profit that gives me the return I want on my investment?”

Whatever the answer you get, it’ll help you decide what to do next!

The ATO multiplier in the equation is what most people miss. Most times we look at profit and sales but ignore assets. The aim to “Buy low and sell high” is a good one but can make us think that “low margin business is bad business”. Thinking that way can blind you to other opportunities.

In a retail or restaurant business you generate profit and cash from selling your inventory – an asset. The more times you “turn” it, the more times you generate a profit from it. That’s the multiplier effect at work.

To increase profit, we look at keeping costs down, lifting prices, and selling more. Not easy to do against rivals. However, our experience is that most coffee shops can grow sales without having to add costs in the shop itself.

Typically, they are busy early mornings, around lunch time, and then in rush hour towards the end of the day. People who value premium coffee are caught up at work. Unable to stop by, they must drink the lousy stuff. This means that in-between time there’s big, hidden potential.

If you could get your coffee to them, would they buy it? If they would, does it mean you’d have to employ more people and buy more equipment? We think not … it’s more a case of doing what you can with what you’ve got but have someone else deliver and multiply for you!

Next time we’ll dig deeper into the numbers …

Please note: No coffee was spilled in writing this blog …

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