I need clarification on my message and would be grateful for any comments or contributions.

Recently I had a discussion elsewhere when it was said "Adam, I just don't understand what you do."  Now it seems perfectly clear to me, but maybe I'm just not expressing ‘what I do' in terms other people can understand.

So here it is:

1. Who do I serve?

I assist small business owners & managers whose sales are costing them profits.  They are usually people who have a professional skill, be it in IT, business services, or trade based such as a mechanic or metal worker.  Their skills have led them to establishing their own small business.  Typically they will have grown to the stage where they employ people, usually between 3 and 20 people.

2. What is their single greatest problem? 

They have no problem getting sales.  Their professional skills ensure word of mouth delivers a stream of customers, even though they don't ‘market'.  Marketing is usually completely foreign to them.  So they have the sales, but their profitability is poor.  This causes poor cash flow, leading them to working harder and harder to keep afloat, and little free time.

3. What is your definitive solution?

I find and plug the profit leaks.

Now when I'm told that "I don't understand what you do' I suspect the issue is in the solution rather than target market or problem but your comments to the contrary are welcome.

Ultimately I'm concerned about increasing profits.  After, that's what business is is all about.  But I'm not looking at chasing more sales.  There are plenty of others offering advice in that area.  I'm concerned about people who are not profitable despite having sufficient sales.

Now I do look at overheads and, Sean-like, I've recently written an article on this (http://www.profitsleakdetective.com/articles/is-there-flab-in-your-overheads.html) but that is not my main thrust.  With some 18 years consulting to small businesses I find very few small businesses that are other than lean in their overheads.

So where can the leaks be?  If the problem is not sales or overheads it lies in the gross profits they earn from those sales.  I usually look in three areas:

  • Are sales being concentrated in the right areas - you know the situation; 60% of the sales may come from one product/service group but only 30% of the gross profits (or whatever the situation might be).  There are opportunity costs of concentrating sales efforts in the wrong area (segment or products/services).  Just be selling more of the right products/service rather than the wrong can change profitability.  The case study on my web site reflects this situation;
  • Pricing - do prices reflect value to the customer?  As you will all know there is much debate on this subject on-line.  Most small businesses leave money on the table.
  • Cost of sales - now the market I'm targetting will make or do something.  So they will spend some direct labour, and maybe some parts or materials the cost of which have to be recovered.  (Don't forget consumables which are sometimes not costed into the invoice.)

Get these right and Gross Profits will be maximised.  Over the years I've become convinced that it is the volume of Gross Profits, not Sales per se which is the key to maximising Net Profit.  How each business maximises Net Profits will depend on their market, and their business model.

As I see it, Yes-Yes factors, bonuses and Upsells are all part of maximising the volume of Gross Profits.

So what do I do?  I find where the (gross) profits are less than they should be and seek to plug the leak.  

Now in reality most small businesses are not collecting the information to identify the leaks easily.  Some digging is usually required.  So we give them some templates to do so.

Is that clear?  To me it is but it may not be to others.

Let me know what you think!

 

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

Are you trying to do too much and getting nothing done?

As a small business owner or manager have you been in the situation where you are just trying to do too much, running from crisis to crisis, filling in roles, directing and doing, so in fact you don't get time to think about what is the best or the most important thing to do.  As a consequence the crises keep on springing up, because you haven't had time to think about how to prevent them, you've time to only put them out.

Doing instead of managing is a common problem in small business, and it condemns owners to a life in the heat of the kitchen, instead of out in front, growing the business and socialising with the guests.  Because you are doing instead of thinking, nothing gets changed, and your business never grows or prospers.  In fact you probably spend a lot of your time dealing with minor and major crises, without the time to plan and create the environment which would prevent the problems arising in the first place.

It was a client's crisis that brought this to mind.  My client was part-owner of a rapidly growing business that did a wonderful job in their particular niche, but had expanded beyond it without being able to create the additional management resources to plan and manage the business.  Consequently the owners were perpetually hands-on, applying band-aid solutions to problems as they arose, without having the time to make a permanent fix, frantically cooking and bottle-washing.

Michael Gerber wrote of this situation, doing not thinking, in his book "The E-Myth" in which he classified small business owners and managers in terms technicians, managers and entrepreneurs.  Technicians are the people with the skill who do the job, and that is all many owners and managers do.  They are good at what they do and want to keep doing it, so they never get out of the kitchen.

Managers organise and plan the day to day activities, getting the business of the business done, whereas it is the entrepreneur who steps back and has a vision of what the business could be.  She focuses on what the business could be and takes it to a new and higher level.

Long before Gerber I learnt of the same concept, except it was presented in terms of managers, supervisors, and workers.  It was demonstrated through a graph, suggesting that business owners and managers should spend 70% of their time managing and planning, 25% supervising and 5% actually doing.  Instead, and how very real this turned out to be, they spend their time in exactly the reverse proportion, spending less than 5% of their time managing and planning, and 70% doing.  I'm sure you will recognise this situation.

The problem my client faces is that they can't afford to hire the management resources to free them up to be entrepreneurial.  So the only solution may be to get rid of the problems, rather than keeping on fighting each crisis.  In other words if they can't afford to hire management time then they should reduce the management requirement so that they need to spend less time cooking and bottle-washing, and more time being the chef, that is reduce the size of the business by getting rid of the problem areas to concentrate on their particular niche that they are good at. 

Then they will have the time to be the chef, doing enough and getting a lot done.

 

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

 

In recent times I've twice gone into the market to buy some business equipment for the office.  Probably the most striking thing from each experience was the lack of sales skills out there.  Winning a sale is more than having a marketing strategy.  Very few people seem to know how to make a sales pitch or even follow up from a sales enquiry.

It is as if they assume that a sale will follow from a sales enquiry or it won't, and there is nothing they can do to influence the result.  They couldn't be more wrong.

So what are sales skills?  They are the mixture of personal selling skills and sales systems that lead to successful business.  Personal skills such as a genuine interest in customers, the ability to actively listen to ascertain the real needs of the customer, to know how to follow up a sales call or offer, to present oneself so as to make the right impression.

And the right impression is enhanced if it is supported by a good sales system.  A system which ensure the right people get the enquiry, that enquiries are followed up, that sales called are planned, and backed with the current information on that particular customer. 

Is it wrong to expect that asking someone to telephone back in response to your interest in purchasing office equipment should lead to a returned phone call seeking further details of my intended purchase?  Of the four calls I made one did not call back.

Now I can only assume that the sales person didn't receive the message, in which case the supplier's system and training aren't very good, or that he forgot, (no recording system), he was too busy (a courtesy call wouldn't hurt) or that they had plenty of business.  Of course, without calling back how would he (or she of course) know how much business I was offering?

If this is their level of interest in winning a sale, what would their level of support be like?  A supplier definitely not worth pursuing.

Now for the second of the four.  My telephone call and outline of our requirements resulted in a few questions about the specification, and within one hour I had an emailed quotation.  Not bad you might say, but it would be nice if he showed some interest in me as a customer, or even wanted to come and inspect our operation, but there was no suggestion about that.  It makes you also wonder about their level of interest in providing maintenance and support.  There has been no follow-up since.  Strike two.

Now the final two suppliers were an entirely different story.  Both questioned me in detail about our requirements and insisted in coming to look at our facility and current equipment.  Both returned to hand deliver a quotation, and came back again with variations.  Both sought options to offer me.  Both want the sale.  Interestingly both are older people, a man and a woman.

Whether it is a factor of being trained in the old school, or just having a real interest in the customer, the change is refreshing.  One of them will get the sale.

Can you assume you will get the sale without some sale skills? 

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PS.  If you would like to comment on this experience please contact me.  Tell me what you think.

At a recent forum I was struck by the similarities between running a city and running a small business.  At issue was the direction of the city, making decisions about the city and its CBD, and actually making things happen. 

There was a strong feeling in the business community that our city had lost direction, that there was no vision for the city and what it could be.  Consequently it was going nowhere.  It was stagnating, and this was apparent.  Empty shops, few improvements, lack of agreement on what to do next, all signs of a city going nowhere.

And of course this in turn was affecting decision making by business.  People became reluctant to invest.  Without investment there was nothing new, buildings and shops became tired.  And tired shops didn't interest shoppers, so they deserted to the suburbs.  Fewer customers lead to less reasons to invest, and so it spirals down.

The City Council had the view that their only responsibility was "roads, rates and rubbish".  In their view investment decisions were purely up to business, and if business needed a prod, then that was responsibility of government.  After all, this was the state capital.

Government's view was that the City Council was the city council and had responsibility for the city.  That is what they were elected for and why resident's and business paid rates.

And business said that, hey, we can invest but we can't make decisions about landscaping, street-scaping, building heights and appearance, all the infrastructure issues. Will somebody JUST DO SOMETHING!

You see, there was no vision because there was no leadership, no-one willing to accept responsibility, set a direction and make some decisions.  And there was no one to follow-up and make sure those decisions were implemented.  After all, implementation, or execution is the biggest cause of failure of any planning.

Does this sound like some small businesses you may have seen.  Businesses that have no vision, haven't or won't change, that have no direction, that don't care about their customers.  Businesses that are just drifting along.  Businesses without leadership and squabbling internally.  Businesses just not making this happen.

Lack of direction and leadership is a recipe for disaster in small businesses, and a city is not much different.

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

Have you been in or seen this situation.  You establish a business and get the formula right.  Things are growing swimmingly; sales are increasing, the money is rolling in, you start to put on staff, invest in more stock, which brings more in more sales, you hire more staff to handle the increased business.  And so it goes on.

And on and on, for a while.  You are revelling in your success in business, and maybe even indulging in a few luxuries to reflect your success.  But almost imperceptibly life starts to get more difficult.  You find you are spending more time at work, there are more problems to solve, and the bills seem to be harder to pay despite the sales continuing to go up.  It has become hard work and you're not enjoying the business, or life as much.

And the enjoyment gets less and less as the whole business just gets more and more difficult.  Suddenly you are not longer the rapidly rising business.  In fact you are going......nowhere.  You've hit the business brick wall.

Rapid growth typically leads to a business hitting a brick wall.  The brick wall has three major elements:

  • Systems - the systems good enough for a business of (say) three people may not be enough for 10 people.  And that for 10 people may not be good enough for 25, and so on;
  • Management skills - the same applies.  As the business grows management must spend more time managing than ‘doing', more time chasing business, understanding the finances, supervising staff etc.
  • Cash flow - more money gets tied up in inventory, work-in-progress, and debtors.  The inventory must be paid for but the debtors are slow to pay.  The more orders to process, the more that are urgent, the more stop-start you get, the less that actually get through when they are supposed to.  And the more mistakes people make.

Businesses can, and do, hit a brick wall more than once as they grow, particularly if they are growing rapidly.  Because they are growing rapidly they don't have the time to step back and look at what is happening.  They don't have time to spot the obvious.

So if this is you, take the time to step back to see the brick wall before you run smack bang into it.  And if you do that, the brick wall will just prove a mirage on the road to success.  What do you do when there is a mirage on the road ahead?  Why, you just cruise right through it. 

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

He's making too much money!

At first sight Bill (as good a name to use as any) was very similar to many of my clients; a tradesman who was very good at his job do he opened his own business.  And because he was good at his trade, his business grew, word-of-mouth referrals led to more business, leading to more referrals. 

After a year of so of these referrals Bill had to start employing people, at first just one, then two, the three and putting an apprentice on.  And the rest of the story is pretty familiar too.

Planning and objectives - now let me see?  How about ‘three time as big as we are', whatever that might mean?  It was pretty hard to pin Bill down any more than that, or what the implications might in terms of working capital, shop floor space, equipment, or number of employees.  I guess these were bridges he'd cross when he got there.

Marketing - none existent.  No advertising, not even Yellow Pages, the only sponsorships being his son's sporting team, no company stickers as a reminder, no give-aways.  In fact Bill didn't even give away his telephone number or e-mail address.  Effectively you had to become a customer to get that!

Pricing strategy - now how much does the competition charge?  Bill doesn't want to be out of line with what his competition charges.  Never mind that he could really differentiate himself by charging more.  In other words, no real strategy.

Financial statements - basic.  Set up by the accountant for accounting purposes, not management purposes.  He couldn't even tell you his cost of sales or gross profit with any degree of certainty.  And as for gross profit by market segment or type of job, no way. 

Measurement, collection of data and analysis - one thing for sure, you can't analyse what you haven't got.  Sure, there were timesheets, employees wanted to be paid, but no job cards for Bill to measure what happened on a job, or whether he made a profit.  Neither did he collect any information on which industries customers might have come from.

Systems and procedures - not a written system or procedure in the place.

In fact there was only one real point of difference in Bill's story.  He was profitable, very profitable.  But why, or how?  Now that's the question.

And the answer to the question is not yet clear.  The local marketplace has been booming, with a great shortage of skilled labour.  So the market suits Bill and he hasn't been greedy with his prices.

Part of the answer may be in productivity.  We've benchmarked Bill's figures against fabrication and engineering small businesses and his ‘sales per employee' are considerably higher than industry averages.  And his overheads are lower than the average.  A nice combination if you can get it.

There may be a key here.  Most small business people like Bill go straight from the shop floor to their own business.  Bill didn't follow this path.  He was Operations Manager of a larger business for a while, responsible for a much larger workforce.

Maybe, just maybe, he bought with him good systems and procedures that underpin his business. 

And if we can get him to document these systems and procedures and to develop his data, information and knowledge to go with them, Bill won't be my typical small business client, but something much, much more.

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

Can there ever be a good time to discount?

Discounting is anathema to most small business owners and managers, as I'm sure it does to you.  You know that while discounting can increase sales, it does so at the expense of profitability.  Any reduction in price reduces your overall margin, your gross profit and hence straight off you're the bottom line, your net profit.

A simple example demonstrates the impact on profitability.  These figures are entirely hypothetical, but they illustrate the principal.

Suppose you operated a fast food cart in a shopping mall.  What you are selling could be hamburgers, meat pies or whatever is popular in your locality.  Site rental costs you $1,000 per week and labour $500.  Your solitary item for sale, be it pie or hamburger whatever costs you $1.85 to make and sells for $3.85, giving you a gross profit of $2.00 per item.  Yes, I know this is simple but bear with me.

So to breakeven, that is to sell just enough to cover all costs before you start making a profit, you have to sell 750 items, a simple calculation of dividing your fixed costs (site rent and wages) by your gross profit of $2.00.

Let's look at two scenarios in our simple example when some things change.

  • Firstly, an increased cost scenario - both site rental and wages increase by 15% to a total of $1,725.  To breakeven you have to sell, naturally 15% more items.  That sounds pretty straight forward.
  • Alternatively, you bravely decide to discount your price by 15% to increase sales.  There has been no increase in costs.  Do the maths.  To breakeven now at the reduced price of $3.27 per item you have to sell, wait for it, .........40% more items.  That is a very large increase in sales.  Can you do it.  And to make a reasonable profit you will have to sell even more.  Can you do it?

So can there ever be a good time to discount?

Well, yes, in certain circumstances.  

If you can lower your cost of sales so that there is no change in your margin then, with your gross profit protected, your nett profit will be unchanged.  Effectively you are competing on costs not price.

In another situation, if your goods are slow moving and have a ‘use by date' or short shelf life, discounting can help.  For example with our simple food cart you can't sell today's food tomorrow, so discounting at the end of the day may help to recover at least the cost of the item, your variable costs, with maybe a small contribution to your fixed costs of rent and wages.  Another example would be fashion items at the end of the season, or model run-out for vehicles.

But discounting generally ?  Only if you are not in the business of making profits.  It's anathema.

A Chrysalis Unfolding

You know what a chrysalis is, the pupa of a moth or a butterfly enclosed in a cocoon.  It is the inactive stage of development of an insect before it emerges to its full glory.  And a wondrous thing it can be.

Watching a small business owner or manager unfold and grow to reach their full glory can be equally wondrous.  It doesn't always happen.  Many, in fact most, remain in the pupa stage.  The reasons for so doing can be varied.

  • They are content where they are and don't want the stresses and strains of growing their business;
  • They like working with the tools of their trade, whatever that may be and don't want to give them up to become a manager;
  • They haven't really thought about it and can't imagine anything else.
  • They have ‘always done it this way' and nothing is going to change them.

Unfortunately, as someone said, you can be on the right track and still get run over.  Staying where you are, standing still in your business market place, can make your business terribly vulnerable.

Change, removing that vulnerability, isn't easy but unless the owner or manager changes their business won't change.  The change is often like emerging from a cocoon into the light, unfolding their wings to display their colours and get ready to fly.

I watched one such change in a client.  It was a second generation business, and Dad was still a big influence.  He was in his seventies and around every day, making it very difficult to break out of the cocoon.  A simple question, "What would you like the business to look like in three to five years?", and it was like the first break in silk.  "I haven't thought about that" he replied.  But you could see a light come in his eyes.

Unlike the butterfly, developing into full management glory and taking flight does not happen overnight.  It takes time and there is much to learn.  But watching the flight begin is indeed wondrous.

Do you want to emerge and fly, or stay wrapped in your cocoon?  The choice is yours.

Picture this scenario. 

You own a caravan park outside a regional town.  Tourism is important to the town, although like mist tourist activities anywhere, it is seasonal. 

Your park is about 10 kilometres outside town, and then another 4 kilometres down a side road, bringing it to the banks of a reasonable sized river.  The individual van sites are large, well above the average for most van sites and the surroundings are well landscaped. 

Tourists often like to fish, and many do, casting a line off from the river bank in the park.  The park is part of a cattle station (ranch) and tourists have a chance to watch the cattle work when that is happening, something the other caravan parks cannot offer.

There is one other point of difference; pets.  Most caravan parks will not allow pets, such as dogs.  Your park allows tourists to bring their pets with them, a feature that is highlighted in their promotional material.

On the downside, virtually all the other local caravan parks are in town, and closer to the main tourist attractions in the region.  That is a plus, although the town can be noisy at times.

To overcome this perceived disadvantage and to make your park more competitive you have priced overnight stay below all the competition, making your park ‘better value', given the extra distance tourists have to travel to get to the tourist attractions.

But the competition for whom?  Your target market is what we call "grey nomads", middle aged people who have decided to spend some of their first year of so of retirement touring Australia with their caravan.  They often like to take their pets with them.  With the ‘baby boomer' generation facing retirement, this is a growth market.  Many an Australian couple look forward to seeing more of Australia, all the bits they haven't been able to have the time or opportunity to get to in their working life.  Do they want to be in town?

Whichever way, your strategy is not working.  Average occupancy during the tourist season is only 30%.   Plenty of room, and profit to grow that.  And the marginal cost of an extra tourist is very low, so there is plenty of gross profit in extra stays.  Yet when people come, they often stay longer than planned.

What to do?  Is the perception of a potential customer "extra travelling, time, need to pay less to get value", or "not very expensive, can't have much to offer, and extra travelling time". 

What if you adopted a different strategy, and built on the extras you can offer, an opportunity to relax in peace and quiet, and pets?  What if you found some bonuses by offering entry to some of the attractions, and put your prices up to position yourself above the market?  Would the potential customer think "at that price they must have something to offer, they must be offering value, something different"?  Would they perceive you as being better than the market?

Would pricing yourself above the market increase, not decrease traffic?  At 30% occupancy, what have you got to loose?

What would you do?  I know what I would do.  Price is a positioner.

Are you one of those people who are working hard, day after day, and probably all weekend as well, who never seem to have enough money to pay all the bills.  You want to pay them, good suppliers are worth keeping, but the cash is always tight.  And of course you have to find the cash for your staff's wages regularly. 

Is the reason that you struggle with those regular payments cash flow that is not sticky, or cash flow that is stuck?

You sell some products or services and cash comes into the business,...... and goes straight out again to the pay the wages and suppliers.  And you ask "just why isn't some of it sticking to the business and building up my bank account?". 

Well maybe the answer is that your sales are just not profitable.  There's just not enough margin between your costs and your selling price for any cash to ‘stick'.  To make your cashflow sticky you will have to do one or more of the following:

  • Increase sales;
  • Find which sales (by product or service, or by customer group) are leaking the most profits;
  • Increase your prices; and/or
  • Reduce your cost of sales in the less profitable areas; and/or
  • Reduce your overheads.

Coat your sales with more gross profits and the cash will become sticky.

Now ‘stuck' money has exactly the same symptoms, but entirely different causes.  It is money stuck in your business, gumming up the working capital wheel.  And because the wheel is gummed up you struggle to find the cash to pay the wages and those pesky suppliers.

It's the wheels within wheels that are the problem. 

  • Perhaps Work in Progress in not in progress?  Are those jobs just taking far too long to do?
  • Is Stock not turning, or not turning nearly as fast as it should?
  • Are Debtors accumulating, not spinning?

Each of these wheels within the working capital wheel, if they are not cycling as they should, will gum up the works, accumulating ‘stuck' money which is not working for you.

Wouldn't you prefer to have money stick to the business rather than get stuck in the business?

 AdamG

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