Some Small Business Sales Numbers
A few special sales numbers that help owners frame, think about, and understand their business.
Of the four essential financial numbers that small business owners need to know, understand and manage, sales is the first, and the most important for success. Profit, operating cash flow, and cash and cash equivalents are also important, but sales takes precedence. It drives the rest, so it demands the most attention.
There are exceptions. Entrepreneurs searching for a product-market fit, for example, may not have to care about sales if they’re backed by investor capital. They can go without for as long as their investors can see a chance of future success (and tolerate the losses). This is a privileged subset though. Just 1% of Canadian small business owners sought equity financing in 20171, with a smaller percentage presumably receiving funding.
Another way that small business owners get to play with other people’s money (and postpone caring about sales) is when the other people are taxpayers and the money is supplied by the government, typically in the form of grants. In ordinary times, this group also forms a privileged subset. In 2017, just 4% of all Canadian small businesses requested government financing.2
Such low numbers show that other people’s money just isn’t a plausible financing option for small business owners. We see it firsthand. From our vantage point at Origami, the most common route for owners to finance their business is to stake what they’ve earned and saved, or what they’ve borrowed (and guaranteed). It may not be their last dollar, but it’s skin in the game: it’s going to hurt (a lot) to lose.
And the surest way to lose in small business is by having a weak and careless sales game. Profit, as I’ve said, is important too. It shows a business can produce and sell something of value, cover its costs, and still have something left over to make the effort and uncertainty worthwhile for its owners. It’s the reason to play the small business game in the first place. But while profit is like food, sales is closer to water or, sometimes, oxygen. Food helps you stay healthy and grow, but you can survive a surprisingly long time without food. Try surviving without water — or oxygen.
A lot of small business owners did “try” it a few years ago when their sales went to zero during the Covid shutdowns. It was reported that “33 percent of SMEs closed temporarily over the course of [2020], for an average of 12 weeks.”3 These businesses had to cling to a raft of government relief programs to keep from folding. The government reported that 76% of all Canadian small businesses requested financing in 20204 (compared to just 4% in pre-Covid 2017). The requests were nearly all approved, and the money helped.
But many small business owners, self-reliant and industrious by nature, found themselves prevented from generating revenue and forced to scrape by on government handouts. It was an upside-down experience: damaging psyches and finances alike. By the summer of 2022, 1 in 6 small business owners surveyed were contemplating bankruptcy and closure if revenue didn’t return, and 6 in 10 were still saddled with an average of $158,000 pandemic-related debt on weakened balance sheets.5
In this post, I want to treat sales as just a number: a number that gives owners some information about their business. Information they need to care about deeply if they care to turn their financial (and psychic) stake in their business into winnings they can eventually take off the table. More precisely, I want to focus on a few special numbers that are particularly important to pay attention to, because they help owners frame, think about, and understand not just their business but business in general. First, I’ll cover three things I’ve found useful to keep in mind when reasoning about sales.
Sales as an accounting concept
In accounting, the top line of the income statement is usually called revenue instead of sales. Revenue is the total income a company generates in a period. Sales, the income earned from selling goods and services to customers, is its main component. Along with sales, revenue can include interest earned, gains from the sale of assets, legal settlements, income from investments, or any other income from sources that aren’t specifically related to sales. In the end, though, sales works just fine for small businesses, because, unlike their larger counterparts, small businesses get nearly all of their “revenue” from good old-fashioned customers. At least during non-pandemic times. That’s why I use sales, the simpler term, rather than revenue, the more formal term, to refer to the small business top line.
Another accounting principle is that sales (individual transactions) should be recognized in the period in which they’re earned rather than the period in which cash changes hands (if these two periods are, in fact, different). This is a basic tenet in accrual basis accounting. For small business owners, this means being aware of and paying attention to the distinction between sales and cash. Sales can be great for a month because you’ve sent out a bunch of invoices, but the cash from those invoices may not arrive until subsequent months — and, sometimes, it may not arrive at all.
Finally, the distinction between gross and net sales is something that small business retailers need to be aware of. Net sales equals gross sales less discounts, allowances, and returns. The sales number that appears on the income statement should be net sales not gross sales; gross sales overstates sales performance and profitability. Small business retailers usually track discounts, allowances, and returns in their own sales systems and provide the net sales number to their bookkeepers.
Sales is a numbers game (Part I)
Anyone who has experience in sales knows this expression. It captures an insight that’s meant to encourage salespeople doing one-to-one selling: when you hit a string of noes, keep going. Sales is a numbers game. It’s nothing personal. The string is going to end. We’re not selling something nobody wants. Someone is going to say yes — if you just keep going. And that yes that breaks the string of noes? It could be the start of a flurry of yeses. Want more hits? Take more at bats. Work on your swing. Want more sales? Make more calls. Make more contacts. Rehearse your pitch. Practice your close. Watch the pros. Learn what works and what doesn’t. Keep going. Sales is a numbers game.
Anyone who has experience in direct sales (search, social, or email marketing, display ads, telemarketing, direct mail, etc.) also knows the expression. You put your message or offer in front of a target group of prospects and usually, hopefully, some small percentage of them responds. To get more customers and more sales, you find more prospects. To improve conversion rates and return on investment, you find better, that is, more qualified prospects, or better offers, or better copy, better ads. Every aspect of the direct sales process can be measured and monitored, tweaked and experimented with. That’s what makes it a numbers game: it generates an avalanche of numbers.
In-person businesses, like restaurants, retailers, and hairstylists, are also playing the numbers game, but one that’s harder to track and measure. These businesses are paying their landlord in part for space, in part for the surrounding traffic. The rent includes the advertising. The storefront is the ad. Measuring the effectiveness of these types of in-person “ads” is not easy. If sales don’t take off, is it the business or is it the location? I know some multi-location stores tried sensors to count foot traffic a decade ago. Nowadays, with cellphones and an exploding market for location data, I imagine the numbers game for physical stores has also moved online.
The key thing to remember is that if you want a healthy and growing sales number then, one way or another, you have to always be selling. At any given point in time, even a highly local market has far more non-customers than customers. Keep playing the numbers game to get in front of non-customers and get a few more of them to jump to your side. If you ever reach the point you’ve saturated your natural market, congratulations! You’ll probably have the resources to expand to another market. And the selling starts all over again. Unless you’re at capacity and happy and hitting your financial goals, and even then, the selling never really stops.
Sales is a numbers game (Part II)
In a previous post on sales, I wrote about the basic sales formula:
Sales = Customers * (Visits / Customer) * (Sales / Visit)
This is a customer-focused way of breaking down sales into component numbers that a small business owner can reason about and experiment with. It says that sales in a period is a function of the number of customers, the average number of times each customer visits the business, and the average spend on each visit. It’s customer-focused because sales is framed as an outcome of customers and their behaviors, rather than an output of the quantity of products sold and the price per unit.
Increasing sales means increasing one of its components, a combination of components, or all of them at once. That’s the technical way of looking at it. The non-technical way is to say a small business increases its sales by better understanding its customers and what it can do for them. To do this systematically, it helps to have a way of tracking the component numbers. This is often easier to do for online and service businesses than bricks and mortar and retail businesses. But, even when numbers aren’t available, it’s the “customer is number one” mindset that’s most valuable. I’m not sure Sam Walton ever relied on these metrics. He was a tremendous operator with rare instincts for retail and for people. He was open to learn, and he constantly experimented. His core philosophy — to put the customer at the center of all the decisions the company made — is not a bad one for a small business to adopt.
Increasing customers means acquiring more new customers (covered earlier) or persuading more of the customers who’ve tried the business to return. The best way to do this is by creating a great first impression, second impression, third, and so on. As with people, the first impression is the most important. The mind makes inferences pretty quickly. The consumer mind, often disappointed, especially so. If you’ve done the work of creating a well-run business that fulfills a real customer need, new customers will notice. They’ll return, and, possibly, return with friends (i.e., refer others). It cuts both ways though. If you haven’t done the work, new customers will notice that too. They’ll add your business to their list of disappointments.
Increasing visits per customer means, first and foremost, good experiences. Good products, good quality, good value, good service, good staff, good process. Achieving great on any of these dimensions doesn’t hurt, but great usually comes with costs. Who pays for these extra costs: owners, employees, or customers?
Friendly, competent, and reliable employees who know what they’re doing and do it consistently and well also helps. This is much harder than it sounds. Outside of the owners, it’s a challenge, given small business resources, to recruit and retain high functioning employees. There’s luck involved, but owners have to make the most of the luck they get: by identifying and nurturing the talent that happens to come along. The risk, always, is that the talented could just as easily leave if the company pastures don’t green fast enough to keep them motivated and interested. It’s usually more sensible for owners to focus on creating a clear, well thought out structure in which work in their business can get done by above average employees than fixating on building a business that requires exceptional ones.
Increasing visits per customer also means reminding customers that the business still exists and of what it has to offer. And giving them reasons to return, sooner rather than some indefinite later. This could mean promotions, or introducing new products and services. Always be marketing is the flip side of always be selling.
Increasing sales per visit means getting customers to engage more with the catalog of products and services. Or it means raising prices. Raising prices usually requires a competitive advantage. It could also be a long-delayed adjustment to a business’s chronic underpricing relative to its market. Or, for the truly bold, it could be a way to test customer’s willingness to pay, if owners suspect customers are quietly getting most of the value from their transactions.
Zero
A business starts with zero sales. This is a critical period. By the time a business is ready to launch, a number of important factors will have already come together. These factors and other early decisions go a long way in determining whether and where the business sails. Of course, owners are right to believe they set the course. That’s a required mindset. Knowledge, hard work, resilience, ingenuity, determination, personal agency, along with luck: all play their considerable part. But conditions and decisions at the start, small differences, work their influence too, subtly affecting the fitness of the new enterprise, bending its path slightly this way or that, just enough that, over time, the vessel ends up in a different place than where it intended. By the time it’s far out at sea, however, it’s very hard to see the traces of those early influences in the waters behind. Owners end up wherever they find themselves, asking the Talking Heads question: “How did I get here?”
I split these early influences and factors into two categories: market and capital. By market, I mean the choice of industry the business operates in, and the conditions of the market during its launch and early years. By capital, I mean the financial, human, and social capital that the business starts with.
Many small business industries have low barriers to entry in terms of capital requirements or specialized skills. They thus attract a lot of participants. This tends to drive down prices, particularly if customers perceive the industry’s core product or service is a commodity. With low prices, the only way to make money is volume: lots of customers, lots of sales. In my experience, this is very hard to get right for a small business. The margin for error is slim, so the level of oversight for costs has to be very high, usually well beyond the capabilities of most owners. For those who try, it often ends up felling like a hamster wheel: lots of effort, no progress.
The alternative to low price in such industries is to vary the product or service in some way to be able to charge a higher price. Or to simply do what you do, charge the higher price and take the business that comes your way. The latter can work in large, fragmented markets where competing businesses have capacity limits or customers want to avoid the switching costs.
Small businesses can also launch in emerging or rapidly developing industries. No one knows what’s happening in these markets. The territory isn’t fully staked. By traveling light but quickly, small businesses can make a land grab and establish themselves in a weakly contested but profitable niche.
As a general rule, it’s better to be part of a growing market than a shrinking one. A growing market can lift up an ordinary business, where a shrinking market could crush a superior one. Finally, timing also plays a role, adding headwinds or tailwinds depending on the general state of the economy.
The vast majority of small businesses launch with capital personally supplied, one way or the other, by their owners. More is generally better when it comes to capital. Better capitalized small businesses have a head start and a longer runway. Their owners may be better at managing their finances, but that’s not always the case. Some people show discipline when sitting on a pile of money, others rush to spend it all. It’s a different and much more challenging set of problems for business owners with too little capital. Every money decision becomes a big one. With no room for setbacks or reserves to support experiments, it may take years to just reach the starting line for better capitalized businesses.
Human capital refers to the personal qualities and aptitudes of the owners. These include the hard skills that come from education and training, which most owners will want to leverage in their businesses, even basing the entire business on them. But there are other things that certainly matter: personality, ambition, integrity, boldness, likeableness, intuition. A long list of intangibles. Finally, social capital is the network of family, friends, and connections that the owners bring to the venture. A strong network will provide owners direct support, referrals, news, and advice and feedback. A weak and isolated network will provide a fraction of that support, leaving its members to largely fend for themselves. It’s true what Mark Messier says: No one wins alone.
One
One represents the first customer, the first sale, the first dollar earned. This is a big deal (potentially), because it’s the first piece of evidence that the business can work. All the pieces — the idea, the pitch, the delivery — they all worked this one time. So why not again? The first customer and the first sale helps the owners see the value in whatever it is they’re doing. Until that point, everything is hypothetical.
But what if it takes a while, or a long while? If circumstances allow, and it’s clearly not going to work, you can switch to something else. The crucial thing is knowing it’s clearly not going to work, which is difficult. Clarity is rarely given to those who need it most. If you really, really believe in the idea behind your business, then it’s maybe a little tweak here, a little tweak there, one more month, one more quarter, the right contact, just one break. There are too many tantalizing stories of others, on the verge of giving up, finding redemption and fortune at the very last minute. I don’t have an answer. A business that you really believe in but isn’t working isn’t a great place to be. We both know that much.
One also represents the first product or service that the business sells. Customers, as Sam Walton liked to say, vote with their feet (or their clicks and taps these days). The first customer vote starts the process of counting and understanding what sells and what doesn’t, what customers buy and what they don’t.
Break-even
The break-even level occurs when sales equals total costs and expenses: the point at which the business is making no profit. It’s a simple calculation, implemented in Excel or Google Sheets in a couple of minutes. Plug in the inputs — usually the gross margin, the operating margin, and the total operating expenses — and the sheet spits out the sales the business needs to cover its cost structure. The same spreadsheet can calculate the sales needed to achieve different profit levels.
Getting to break-even becomes the priority once a new business has established a steady stream of sales. Getting a steady stream of sales could take some time, and the business will be losing money over that interval. This is when owners have to hustle and grind, try, fail, and try some more. The longer that interval stretches, the more urgent it becomes to stop or at least slow the bleeding. At some point that may pass unnoticed by anxious and exhausted owners, sales will finally be coming in at a reliable pace. The business will feel like it isn’t in imminent danger. But it’s still losing money. Owners have to recognize that the house is still on fire somewhere. They can’t be complacent. The fire needs to be put out before it sneaky causes the structure to collapse. They have to still get to break-even.
Small business owners should always know their break-even sales level at their current cost structure (gross margin, operating margin, total operating expenses). It’s an unfortunate reality of small business life that, even after years of trying, failing, and trying again, a business may find itself still not generating much in way of profit. Any unexpected bump in the cost structure — higher commodity or labor costs, a new lease — will threaten to put the business back in the red when sales fall below the new break-even point. In those situations, owners need to review the numbers. They need to understand the new sales level they’ll need to break even with the new cost structure. And then decide if it’s a) feasible and b) worth it.
Twenty five
In any field where performance can be measured, participants will want to compare themselves against their peers. They want to know where they stand. They want to know if their performance is improving relative to others. They want to know what it takes to get to the top. For comparisons to be made, the performance data has to be widely available. Happily, this is the case for small business sales.
The Government of Canada hosts a very useful dataset of small business financial results called Financial Performance Data. It “provides access to more than 1000 industries across Canada, including more than 30 performance benchmarks to help small businesses determine how they measure up to their competitors.”6 Users can create reports by choosing the small business revenue level, incorporation status and region, and NAICS industry code. They can break the results up into quartiles by total revenue or profit margin. By selecting total revenue, small business owners can see the revenue levels for other businesses in their industry. The site separates small businesses into two revenue categories: under $5M and between $5M and $20M in annual sales. The first category (under $5M) is much, much larger than the second — it’s also the group of businesses that we serve at Origami.
In their Financial Performance Data reports, owners should pay particular attention to the revenue ranges for the top quartile, that is, the revenue range for the top 25% of small businesses in their industry. The lower value of that range should serve as a benchmark or target for sales. If the business has annual sales above that level, then it’s in the top 25% in its industry. If it doesn’t, the owners have a target, and they have work to do. Getting to the top quartile is a significant step to success.
This month
Small business owners obviously need to know their current sales numbers. But, caught up in all the things they need to do to run a business, they often don’t. Sales trouble, good or bad, tends to sneak up. Good sales trouble is when sales grows quickly and the company strains under the financial (need for more working capital) and logistical (need to work at or beyond capacity) pressures. Bad sales trouble is when sales sinks or slides, and the owner, too busy to notice, doesn’t take steps to reverse the trend or cut costs to be in line with the new normal.
Tracking the sales number throughout the month is a must practice. It keeps owners alert and familiarizes them to the rhythms of their business. That feel for the numbers makes it easier for owners to spot when something has changed.
Small businesses are credited with being nimble. This can be true when it comes to pursuing new opportunities. But I think many or most operate with an inflexible, or not flexible enough, cost structure, and the owners don’t pay close enough attention to their numbers to effectively manage change. The time it takes for them to react to changes in their environment adds costs and losses that could be avoided if they made it a habit to check their sales numbers throughout the month.
Last month
How do small business owners know when a change in sales is a signal rather than random noise? How can they spot a trend or a new normal? By comparing current sales numbers with past sales numbers: last month, the same month last year, the trailing twelve months. Past sales numbers provide the context to interpret current numbers: Are sales up or down? By how much? Have they been trending up or down over the past year? Or have they been flat? Are the differences big enough that I need to be concerned? Are the trends established enough that I can put some stock into them? The series of numbers provides more information than any single one. The actual past results, in addition to throwing the current ones into relief, also provide the anchors to plan future results.
Next month
Unless their business is a hit, with sales coming in fast and furious, owners, at some point, are going to have set sales goals: specific targets with specific timelines. Next month. Next six months. Next twelve months. If they don’t, they’ll tacitly accept that sales is whatever walks through their doors. “Look at the birds of the air, for they neither sow nor reap nor gather into barns; yet your heavenly Father feeds them. Are you not of more value than they?”7
Setting a target is a way of asserting that sales is a variable that can be influenced and directed, instead of just received. Larger businesses have to forecast sales, because their production and operations teams and other departments need to plan how to produce and fulfill the anticipated volume. With small businesses, it’s more a way of recognizing sales as an important piece of work that, along with looking after existing customers, also needs to get done: it needs resources and someone in charge of thinking about and delivering the results. This often falls to the owner, with the risk that the work doesn’t get done. Because the owner gets to choose what to do, what to pay attention to, no one questions sales being neglected. Until, of course, it’s a crisis.
One fix, if the business has sufficient resources, is to put someone other than the owner in charge of sales. There’s no guarantee of results, but at least this other person understands that it’s their job and they’re accountable. Another option, if there are multiple owners, is to have just one assume the sales role. Accountability is tricky with owners sometimes. Many chafe at the idea of being answerable to a “boss”; the hope is that achieving success together is more important. A single owner going after sales on his own will need discipline, focus, and candor. And possibly an employee or friend he can enlist to help him stick to his plan.
Wrapping up
I want to close with a quote from Sam Walton’s autobiography. Once we get past sales as a number, we have to get busy with sales as something we do. I read this again last week, and I think that, despite the different eras, it captures that idea well.
In a farm-to-market town like Newport, the big shopping day was always Saturday. That’s when the whole family would drive to town and spend a few hours — maybe the whole day — walking around looking for what they needed in all the stores. Something had to attract them to a particular store, maybe a combination of things: the storekeeper’s personality, the freshness of the goods, the prices — an ice cream machine. We thrived in that competitive environment.8
Ibid
“In 2020, 82 percent of SMEs requested external financing. Seventy six percent of all SMEs requested government financing, 24 percent requested trade credit, 16 percent requested debt financing, 6 percent requested lease financing, and 1 percent requested equity financing.” Ibid
Matthew 6:26-34, New King James Version
Sam Walton, Made in America. p. 222.