22nd January, 2007

It's a bit of a misquote really, but most people do just that, misquote this little scene from Shakespeare's "Macbeth".  Actually it is "Double, double, toil and trouble, fire burn and cauldron bubble", with the three witches tossing a veritable potpourri of somewhat horrifying ingredients into their pot, to brew a charm that is ‘firm and good".

Business can seem like a bubbling cauldron at times if you are the small business owner or manager.  Bubbling and spitting away: a job well done here, a misquote there, a sprinkling of lost  tenders, break even sales, seasoned with a satisfied client, a pinch of cost over-run, a creep of expenses plus a spoonful of disgruntled employee, a dash of competition and all bound by government regulations. 

But does a ‘firm and good' charm eventuate, a charm for your business that will make life comfortable, in the form of good profits, a positive cash flow and enough free time to spend with the family?

So what are the ingredients going into your pot for 2008 to come up with a fair and good charm for the year?  What will the charm be, and how have you come up with those ingredients?

Which in a roundabout way leads me to ask you whether your have set yourself some challenges to be achieved in 2008?  And if you have, how did you decide them?  Very often people set out a series of "New Year resolutions" for their businesses or themselves which are no more than wishful thinking, but I'm sure you are not one of those.

You may well have taken a more considered approach and looked at:

·         The successes in 2007, what were your biggest accomplishments and what you can build on in 2008?

·         What were the biggest disappointments in 2007, and why?

·         How did you limit yourself in meeting 2007's challenges and what do you have to do to overcome these limits?

·         What can you learn from the above?

·         How will you apply these learnings in 2008?

In many ways it is not the objectives that you set yourself that are important.  Rather, it is the barriers and impediments that limit you and stop you achieving your objectives and challenges that must be overcome.  If you can remove the barriers and impediments then the natural drive behind the challenges you have set yourself will get you there.

Or as a colleague puts it, concentrate on removing the things that you aren't going to do this year, and you will find yourself freed up to achieve the things you do want to achieve.

So why don't you let me know your cauldron's ingredients for 2008?

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Why they don't is another profit leaking paradox

6th December, 2007 

Now there are a couple of questions behind these questions that you need to think about.  Perhaps a good time would be to think after you (try to) answer them.  These two questions are: why don't you know the answers, and could you information system readily supply them.  Now for the 7 questions. 

Could you, in half an hour or less, tell me the answers to these questions. 

1.       Who are your top 10 most profitable customers ?

2.       Who are your bottom 10 least profitable customers ?

3.       Do these figures include all the extra costs that tend to creep in, such as special packaging, customisation, special freight requirements, etc ?

4.       Which are your most and least profitable types of customers ?

5.       How does the profitability of old products compare to that of new products ?

6.       Where are the anomalies in your customer profitability, i.e. customers who are very profitable when similar ones are unprofitable, or vice versa ?

7.       How much working capital is tied up in each type of customer ?

You may not be surprised that very few people can answer yes to all questions.  Could you?  And you have to ask yourself why?   Which leads us back to the two questions I asked you to think about whilst answering the 10 questions.

Why don't you know?  Is it because you have never asked yourself these questions?  Can you see the potential profit leaks that may be unearthed if you could answer them. 

For example:  servicing customers takes time and effort.  Now I'm not saying that it shouldn't.  Properly servicing your customers is of course quite critical.  But if the returns from providing that service are lower with some customers, and higher from others, surely the lower return customers are a profit leak in terms of opportunity cost.

Now this opportunity cost situation might arise with different customers, and if they are from the same industry or market segments then why, or with different industries or market segments. 

Either way the decision you should be making is whether to concentrate on building on those whom give you the best return, or finding ways of making the less profitable more attractive from a financial point of view.  The one thing you shouldn't be doing is just accepting the status quo.

The same situation arises in relation to products.  Would you not be better off concentrating on the more profitable of your product offerings, if you knew which these were?

Not recovering all the costs of servicing a customer is an even more obvious profit leak.  If there are such costs, and they do creep in unrecorded surprisingly often, not recovering them against the customer who incurred them just means they come straight of the bottom line.

By the way, how did you go with the half hour limit?   If you didn't quite make it, maybe it is because you haven't asked the questions before.  And if you haven't asked the question, can your information system readily supply the answers? 

If the answers are too hard to pull out then the events of the day will take over and the questions just won't be looked at.  So you need to get your information system set up to supply these answers when you want them.

If you don't ask questions like these 10, then the chances are you are leaking precious profits.

What do you think?

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PS:  I am indebted to Alastair Drybugh of Akenhurst Consultants Ltd, (www.akenhurst.com) for these questions.  And very good ones indeed they are.

And how they got it nearly right!

27th November, 2007 

Let me set the scene.  We pulled up at service station on an east coast highway, not for fuel but to get something to eat.  The service station, as many do, had a restaurant attached as well as the usual counter sales to go with the petrol.  However, it didn't have much parking space for people like us who were seeking to sit down with our food rather than grabbing something to eat whilst driving.

The main parking space was on the other side of another building.  So people had to walk past the building to get to the service station and its food.  Inevitably there was another food outlet at the front of this building, a take-away seafood shop.

And that was where the trap was set.  While some motorists might specifically be seeking seafood many others may have nothing specific in mind and be looking for a range of choices.  These people were doing a beeline for the service stations food outlet.  What to do?  Set a trap of course.

The trap was a young chap, probably the grandson of the owner of the seafood shop, stationed right on that beeline, and armed with a handful of menus.  "Would you like to see our menu" he would say, thrusting a blue piece of paper under the nose of the visitor.

A good idea, but poorly executed.   Some would stop, take a menu, with only a proportion of these taking up the offer and entering the shop.  Many more just kept on walking to the service station, not even stopping to consider the offer.

I'm sure you can spot why.  It's like what happens in a shop when you're considering what to buy. A bright young shop assistant will come up and politely ask "Can I help you?", thinking that she is doing the right thing.  But she isn't, as I'm sure you know.  Because you will give only one of two answers, either ‘yes', or ‘no'.  And if it is ‘no', end of conversation.

Just so, because that was exactly what was happening with the young grandson.   Right strategy, wrong tactics.  The majority of people would simply say ‘no', and keep on walking.

So what could he have done differently?  He could have put them in a "yes, yes" situation.  What if he said "Would you like to try the very fresh prawns we have, or some fillets of freshly caught bream?"  Now he has the chance to start a conversation, and once he has a conversation going, they will almost certainly take a menu.  And armed with the menu....???

Now this is still not going to trap every visitor heading for that service station, but what's the bet that he would stop a lot more visitors, and get a higher proportion going into his grandfather's seafood shop?   What do you think?

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Now this is not an easy one.  It is subjective, almost intuitive, and very hard for you to undertake with your own business.  Reading the signs at others is much easier.  It probably comes about through experience.  I can't put any other explanation to it.

My original background was in the metal working manufacturing industry, and it was in this industry that I first found I could develop a feeling for a business as to whether it was a good business by doing the obligatory walk around you often do when visiting.  By a good business I mean working well and likely to be a profitable business.  One with which you would like to do business.  Conversely if I came away with a poor impression that was likely to be right as well.

And unless you think this is just the personal experience of one person in one industry let me illustrate otherwise.  A few years ago I was talking to some experienced stock inspectors in the Northern Territory of Australia about their experience visiting cattle stations.  For those of you from elsewhere let me translate; a stock inspector is a government livestock inspector who checks the health and care of cattle and other stock on cattle ranches. 

These blokes reckoned they could tell whether the station was a well run station almost as soon as soon as they got inside the gate.  For them their experience let them reach a conclusion almost subconsciously.  When questioned as to how and why they suggested it was probably a combination of the condition of the livestock and the roads, fences, and pasture.  That is, the product and infrastructure.

It is the same group of factors in industrial businesses and offices generally, to which I would include the general demeanour of the people working there.  Now you can usually tell if a special tidy up has been done for the occasion but most of the time when you see a business you see it how it is.

So try this.  Start outside the front door of your business.  Put on a pair of ‘visitors eyes', look at your business as would a visitor seeing it for the first time.  What doe you see?  What are the impressions of the business?

Is it well presented, does it look professional?  Or is it just, well, shabby, somewhat neglected.  If is, why is it so.  Often businesses look run down because they are run down.  And this is because management doesn’t care, or can’t afford to.  Neither are good signs.

Now you are entering the business.  What do you see now?  Does what you're seeing give you confidence in the business?  Would you order from it?  How do the people seem - friendly, smiling without an effort?  Is there a warm feeling to the business?  It is surprising how warm some businesses can feel, and how cold and impersonal others do.  Again, how is it presented internally, professional or shabby?

 

Now you've gone beyond the entrance to the backrooms, or the warehouse of shop floor.  Is it tidy, well organised, or are items and equipment stacked carelessly, untidy, perhaps an accident waiting to happen.  Do you get the impression people have pride in their jobs, and in the business.  If not, another signal. 

It has, I think, much to do with the culture of the business, and its owner.

So what have you found about your business?  Is your business one that you would like to do business with?

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Now I know that this is a rather trite saying but you know what it means.  When somebody first comes in contact with you and your business, or a representative of your business, they will form an impression of it.  And that impression will govern how they see you and your business.  It takes a lot to change that first impression.

Another view on the impression your business makes on customers was given by Jan Carlzon, CEO of Scandinavian Air Service (SAS) who coined the phrase "moments of truth".  He used the term to mean those moments in which important impressions of your business are formed and where there are significant opportunities for good or bad impressions to be made.  Every time a customer comes in contact with your company is a moment of truth, moments that ultimately determine whether you will succeed or fail as a company.  Some are more important than others and are the moments when you must prove to your customers that your business is their best alternative.

Such 'moments of truth' are often seemingly trivial events, for example when they walk into the business and front the reception desk, when they waiting for that service call, or speaking to your accounts people.

So let's look at some specific examples, two of which come to mind immediately.  For some reason both involve the same industry, but different businesses.  And they involve sales staff in an industry that is epitome of hard selling. You've guessed it, cars, although new, not used in this case.

In the first case, a colleague of mine was hoping to buy a prestigious brand.  Three times he contacted the business, including a visit to the showroom, looking to organise a test drive.  And the outcome, no-one seemed interested in returning his call.  On his visit to the showroom, the sales staff were too busy talking amongst themselves to come over and ‘talk to the customer'.  He left. 

It was only by a near subterfuge that he was able to get the email address of the group CEO, enabling a suitably descriptive message to be sent.  The next day a somewhat peeved salesman brought a vehicle around to my colleague's office for the test drive. He must have really wanted that car, because despite these successive ‘moments of truth', he bought the vehicle

In the second example my friend managed to get the test drive, but couldn't get the quotation.   She was joining one of Australia's largest companies as a reasonably senior executive.  On might have thought a local company might have wanted to create a favourable impression, to get an ‘in' with such a company.  No - it was just another sale apparently.   After much chasing up the line a quotation arrived.  No apologies or anything like that.  In fact the salesman obviously had just rubbed one name out and inserted another in the quotation. 

Now I know the margins in cars is not that great.  Companies rely on the service and part sales, and upgrades to make their money.  After treatment like that, would you feel loyal to the supplier?  Would you go back to them for repeat business. 

Repeat business is the ultimate test, because that is where the profits are made.  In one of those cases above, the buyer is going elsewhere for service as soon as the warranty period is over.  No ‘ifs and buts!"

Perhaps the Moment of Truth should be tattooed into the salesmen's foreheads.  "Anytime a customer comes into contact with any aspect of a business, however remote, is an opportunity to form an impression."  There are no second chances on this.

 

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Do you know whether your costing and pricing is reasonable, that it covers all your costs and provides a margin of profit?  It is so easy to assume that our costing and pricing are reasonable, when they just may not be, especially when the business is operating in the black.  If your business is making a profit then things must be alright, mustn't they?

Well, maybe not so.  Consider the case of this laundry business which for the sake of anonymity we'll call Cromar.  Like most laundries Cromar serviced a wide range of clients from Mr. and Mrs. Joe Blow to sporting teams businesses and accommodation houses.  So they were dealing with individuals on a personal basis and businesses on a business basis.  Individuals provide myriads of small individual transactions and are a valuable part of the business.  However it is the business base which provides opportunities for volume over which to spread the fixed costs of overheads. 

Why is volume important?  Laundries are a commodity business.  There is little opportunity to differentiate the product, except on service.  So margins are low and throughput becomes important.  The more units processed, the lower the fixed cost element per unit, and the higher the return.

Cromar was big enough to be more than local, operating in a number of regional centres.  Get the throughput, spread the overheads, reduce the cost, improve the margin.  Sounds good, and so it is, if you can get the fundamentals right.

Getting the fundamentals right became an issue when the business was asked to tender to a business which owned several large motels.  The deal would offer them consistent volume over the year, more than half a million dollars worth in fact.  A deal well worth winning.

But winning became a question when the laundry held discussions with the potentially valuable client.  The client liked their prices on some items, but not on others, which in turn raised questions in the management's mind.  Were their costings and pricing reasonable.

In fact the reasonable thing to do seemed to be to have them checked.  Bring in an expert from outside to go through every aspect of their costing and pricing.

The results?  Well, they were interesting.  That is one way of describing them.  Interesting because of the questions they raised about how costs were allocated and prices developed.

Essentially the outside review found that costs were not being allocated correctly and prices charged as a consequence were, in some cases, insufficient to cover costs, and in others more than sufficient to the point where the margins were, shall we say, generous.

No wonder the potentially valuable client had questions.   He was happy to take the lower prices but less than enthusiastic about the higher.

There was a happy ending to this tale.  With revised pricing Cromar were able to negotiate a satisfactory contract that kept both sides happy.   But it does leave asc question for you.

And that question is: "Do you know whether your costing and pricing is reasonable, that it covers all your costs and provides a margin of profit?  How long since you have reviewed your costing and pricing?

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The new clients across the table were perplexed, and somewhat angry.  They had been sub-contractors in the construction industry, They had a track record of successfully completing projects over many years but now were not winning jobs, particularly through Government tenders and quotations.   Why was it so?  Was not their track record a demonstration of their ability to do the job?

The United States is often referred to as a melting pot of people.  People from all reaches of the world have settled there over the years, giving it a great diversity of beliefs, experiences and cultures.  But it is not the only country with such diversity.

Australia is another.  On recent figures approximately 25% of Australia's population was born overseas, and about 40% were either born overseas or had at least one parent born overseas.  It is a staggering figure really.  People from Britain and northern Europe, the Mediterranean, Middle East, Asia, the Americas and of course we can't forget our Kiwi cousins from across the ditch.

But so many of them are from a non-English speaking background.  Call up any trade in Australia and so many will be Greek, Italian or from the former Yugoslavia.  The building trade would not survive with out their sub-contractors from all over.

And therein lays the problem, the book and its cover.  Sub-contract jobs have to be quoted and, if it is a Government contract, the paperwork required is increasingly complex and regimented.  Unfortunately being compliant with the tendering requirements is mandatory with Government tenders.

Mandatory it may be, but for traditional subbies from a non-English speaking background who have never needed to read or write well in English this can be difficult.  And in turn the more mandatory the requirements become so not being able to complete the quotation or tender response well leads to loss of jobs.

Bewilderment is the result, especially when there is a track record of doing good work.  It was good enough in the past, why isn't it good enough now.

So with my new clients I explained the need to answer all questions, and to answer them properly, to correct all the spelling mistakes (quotes from such subbies are rarely typed), and to generally make a good presentation.

It's like a book I said.  Your proposal is but one like one book on a shelf of books.  As with your work the content may be great but unless the cover entices the buyer to take the book off the shelf and suggests it will be well worth reading, it will never be read.  It's the cover and the promises it makes visually and in writing that entices the buyer to take it off the shelf, and start reading.

Ah, said my client.  Now I understand.  It's no longer good enough to good work.  You have to put the right cover on the book first.

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There's always an excuse isn't there?

My friend Kendra had a problem.  He liked things done properly, and it was one of the reasons he was a good businessman.  Do it properly and it wouldn't have to be done again.  It gave his business a good reputation.  People knew he could be relied upon.

And to ensure that he could be relied upon every time a new person started he gave them a good briefing on what was expected of them and how to do all the myriad of things to be done in a retail/wholesale business.  Usually this was good enough but when things did go wrong the usual excuse trotted out "But you didn't tell me" or some variation thereof.  It used to make Kendra so mad.

Something had to give.  The straw that broke the camel's back was a delivery for a major project in town.  It was a prestigious project and although Kendra's products were only a very minor element they were very visible and, in their way, quite critical.

It was a supplier who started the chain of events that got Kendra so fired up he finally decided to do something about the perennial excuse.  The supplier was late delivering one of the products Kendra was supplying the project.  Inevitably it was a fairly important product.  Eventually an overnight air delivery was arranged and Kendra organised his local delivery company to pick it up and deliver it next morning with the other supplies being dropped off.

There were eleven boxes to be delivered and the missing product made it a neat dozen.  Delivery truck duly arrived next morning and Kendra's new storeman signed for the dozen boxes.  Job's done, as they say.

But was it?  Because he was concerned about the delays with his missing box Kendra wandered out to stores and counted the boxes, all eleven of them.  That's right... eleven.  You can guess which one was missing.  Murphy's Law applies again.

You see Kendra's instruction for all deliveries was, as is pretty normal, check the deliveries against the delivery docket.  Pretty straight forward.  But out came the usual lame excuse "But you never told me" wailed the storeman. 

Wail he might, but Kendra was in a bit of a pickle now.  He still didn't have the missing product, his client was starting to make his impatience pretty obvious, and as far as the supplier, and the delivery company were concerned Kendra had taken delivery.  There was a signed docket to prove it.

By the way the missing box was eventually found but that's not the point of the story (which is all quite true, just a name change). 

Kendra resolved that never again would his staff be able to get away with excuses that amounted to they didn't know.  He had good systems and procedures that worked well when they were followed.  The failing was that they were not documented.

This was where I came in.  I helped Kendra and his people document all the procedures they used in the business, how they went about it, all the steps that ensured his business did have a good reputation.

When the job was done Kendra put on a barbeque at his home for all staff.  Each and every person was given a copy of the manual, which they had to sign for.  And all new staff received and signed for a copy on commencing employment.

That would be the last time Kendra would hear that lame excuse "But you didn't tell me".

There is of course a point to this tale - documented procedures help make good businesses.  How are yours?

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If you have subscribed to our newsletter and read the case study you will know that if the company had a procedure to review its operations on regular basis, they would not have got into trouble in the first place.

PS  If you would like to comment on this topic please contact me.

Or are you condemned to push harder and harder without being able to get off?

Why do you get on a treadmill - to get fit of course!  And you know what those "get fit" treadmills are like.  You get on them and start pacing away, and it all seems quite easy at first.  The pace is not too hard and you're breathing easily.  And then the trainer starts to lift the pace of the machine.  You start to lengthen and quicken your stride.  But just when you think you have that beaten, it goes up another notch.

And now it's really hard work.  You have to put real effort in, but the treadmill keeps turning carrying you onwards.  Not that you're going anywhere, it's a treadmill after all.  And you're running, and you can't get off, just go faster and faster, harder and harder.

Faster and harder, and you can't get your breath, and you can't stop, until you collapse in a heap on the treadmill.

And why are you in business?  To make your business fitter, to make a profit I hear you say - or I hope I hear you say.  After all you are not in business just to earn a wage, are you?  And to earn a profit you must first get a sale.  After all a fitter business is a profitable business.  But what is winning sales and making profits from them what sales and profitability is like in your business.  Is it like being on a treadmill?

At first the sales treadmill seems easy.  The sales come without too much effort.  The after a while as sales increase profitability starts to slow you down.  Profitability is not increasing as fast as sales.  So you up the pace of the treadmill, to increase the sales to increase the profits.  Gotta get those profits back up to where they should be. 

Pretty soon you find you are powering away on the sales treadmill, trying to earn those extra sales which will make you more profitable.  And you're powering away so hard you don't have time to get your breath back, let alone step back and take stock of the situation, to observe what is really going on here.

You have to ask yourself, is the business getting any fitter while you're working so hard at it.  And as a small aside, are you getting any time off from your fitness regime?  I suspect not.

Might it not be better to put less effort on the treadmill to increasing sales, and more effort into making your sales more profitable?

How do you do that?  Well that is what the Profit Leaks Detective is all about.  So if you haven't subscribed, think about doing so.  It might just get you off the treadmill, and make you and your business fitter.

If you have subscribed to our newsletter and read the case study you will know how that company got of the sales treadmill, and increased their profits.

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PS  If you would like to comment on this topic please contact me.

Say "no" and prosper

What do mean, say "no".  Any business is good business, or so some people seem to believe.  But is it?   Just any business may not be good for you.  To the contrary, it may be very bad for you, or at least for your business.

Let me illustrate with a tale of two businesses, both of them in the same light fabrication business, both about the same size.  Now cash flow for the first is extremely tight.  It makes life very hard for them.  And because it is very tight, they are always afraid that it will fall away.  And where will they be then? 

Because they are afraid of business falling away, they don't say no to new jobs.  And because they are afraid of the impact on their cash flow of not having the job, they quote to make sure they win it.  So you know what they are doing, they are cutting their margin to make sure they win the job.  Naturally they win their share of jobs they quote on.

But winning their share of jobs has its problems too.  With money being tight, they need to keep their costs down, so they don't have as many people on the shop floor as they should.  There is always a consequence isn't there.  Delivery times are not always met.  They really need lower prices to compensate for the lower value they are delivering to their customers.

And with no margin, they are always late paying their suppliers.

It really is a bit of on endless treadmill, one way or another.

So now for the tale of the other business.  Remember, same industry, same size, same market.  The only difference is that there is no treadmill.  If the owners can't make a decent margin on a job, they won't take it.  They say "no". 

As a result they can afford to do the job properly, and deliver on time.  And because they do just this, they are known for delivering value, and they win their share of work too.  Profitable work at that.  In fact the company is extremely profitable.

Being profitable, they pay their suppliers on time as well.  So suppliers are happy and give them good support.

Life is not a frantic, endless pounding on a treadmill.  Life is relaxed, thoughtful, with time for the family and holidays.

And just to confirm that saying "no" works elsewhere, here's a story from a completely different industry, the IT industry.  This company was growing, but it was profitless, painful growth.  Cash was always tight, and the company lived on a knife edge most of the time.  They were good at what they did, but it was all a bit of a struggle.

One day they got a new General Manager, and gradually the struggle ended.  And the company took off.  They now operate in four different countries and have an extremely good business.

So what was the change?  As the General Manager said to me "We didn't begin to grow, until I learnt to say no!

Finally, if you have subscribed to our newsletter and read the case study you will know how that company learnt when and where they should say on.  And look at the difference saying no made to them.

So learn to say no, and watch your business prosper.

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PS.  If you would like to comment on this topic please contact me.

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