He had a glum look on his face. We had just finished a workshop on marketing
and tendering to Defence and this small business participant was struggling. “It’s a lot to take in” he said. “I’m just a tradie, now I’ve bought out this business and I’m a Managing Director. It’s all a bit overwhelming. Where do I start?”
A good question indeed and it lead me to try and think through what are the key attributes of a profitable, growing and sustainable business?
People who start businesses without understanding how businesses work end up creating employment for themselves and a few others, and not a business that can create real wealth. They have been called self-employment companies. A self-employment-company is one in which the success of the business depends on how long and hard you work.
I'm not so concerned here about individual skills like leadership, the ability to delegate, accountability, the ability to develop a harmonious culture. There is no denying that these are important, but it is not the individual skill I am concerned about.
Rather it is attributes of the business as a whole.
Here are my thoughts. They are of course open to challenge and I would be interested in your comments or suggestions.
There are two components of this; direction and capitalisation.
Direction - A good business has a clearly defined strategic direction, an overall vision goal, what they want out of the business and where they want to take it. So many small businesses drift aimlessly, caught up in the day-to-day currents of doing, but going nowhere.
A sure sign a company is not doing as well as it could is when the owner’s focus is 100% on short term goals, on what he is going to do today, and not where he is taking the business. Direction is critical but if owners and managers ignore that and focus on getting the sales in now, prioritising immediate sales over everything else, including customer service and satisfaction, then it doesn’t matter which way they go, they’re steering for no particular port.
A recent planning session with a client emphasised just how important it is to determine direction with clarity. The business has four major product groups, one of which has grown to represent about 70% of sales, a dangerous dependence.
We were examining future options for the business to reduce this danger when it became apparent that there was major constraint on the options that had not been voiced. That unvoiced constraint meant that most of the options being canvassed would not have been realised had they been pursued.
They just weren’t where the owner wanted to take the business and would have been resisted, probably unconsciously. Once that constraint had been put on the table the future direction was very clear, and greater clarity given to the options being discussed.
Good businesses have a clear business focus on what business they are in and on their target market.
Capitalisation - Undercapitalisation is a major cause of business failure. Capital is required for two types of assets; fixed assets and working capital.
Capital is required for two things:
Fixed assets – you need an office or a workshop from which to run your business. It may even be a home office, in which case it requires little capital. Depending on your business you may need equipment, at least a vehicle and office equipment, and maybe much more in operational equipment.
Working capital – to work your business, that is fund your day-to-day, week-to-week and month-to-month activities. That may have to cover wages, stock, debtors and pay creditors. Much will depend on the cycle time of your business, whether you provide credit and the terms of that provided to you.
Well capitalised businesses have the right premises, facilities and equipment to deliver sufficient value to the customers, and because they are able to deliver value they have a good customer base and good margins.
Most small businesses, because they are founded on the technical skills of their owners, focus on the operational aspects of their business, doing the work.
They fail to recognise the primacy of selling; that unless you know how to win sales for your business and keep on producing sales your business will not be sustainable.
Unless you are willing to market your product, you won't succeed. Business is selling, acquiring and keeping customers.
“Of the major functions of business – product development, customer service, accounting, operations, and marketing – the one that always should be given top priority in an entrepreneurial venture is marketing.
The other functions are important, but without marketing you will not have sales and without sales you will not have cash flow and without cash flow you will not be able to pay for all the other functions (except by going into debt, which is simply borrowing against the cash flow of the future).” (Michael Masterson)
There is one other aspect of acquiring customers to think about. For all the importance of the lifetime vale of a customer, nothing lasts forever. Look at your customer list from even two years ago. What proportion are still there today?
Let me ask you three questions:
• How many sources of new clients do you have?
• Do a large percentage of your clients and income come from one source?
• Have you ever implemented a strategy that got you clients at break even or better and then stopped doing it?
Good businesses have learnt the lesson – they have clear strategies to keep acquiring new customers even while looking after and treasuring their existing customers. Keep exploring new ways of acquiring customers.
My next post will look at the remaining two “Must Haves”.
There’s nothing like an outside view. So often we are too close to what we have written to properly assess our response. The outside view sees what we don't see.
Or buy "Small Change, Big Result", my manual on how to increase your success rate with proposals and quotations; make a few small changes, and reap the rewards.
© Copyright 2018 Adam Gordon, The Profits Leak Detective
Some profit losses are pretty obvious - so you fix them.
BUT, what if you don't know profits are leaking, cash out the door?
Possible leaks could be anywhere.
Are there some clues or symptoms that are tell-tales?