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

Not everyone is greedy.  How often have you heard someone, usually someone who repairs consumer equipment, say that they just couldn't pass on some of the costs of repairing that bit of equipment.  "It's not worth that much.", or "the customer won't like it and won't pay". 

Never mind that you have to do the work, and you have to recover your time.  A recent client bought this to mind.  He and his wife ran an electronics repair business in an inland Australian town, TV's videos, CD players and other electronic & electrical items.  From all reports he was a good technician and there were no problems with the work.

But there were problems with their business.  It needed a good repair itself.  They were unprofitable, and getting more so.  And this was despite the hours the technician was putting into the business, working until 11.00 each night and on the weekend, about 64 hours a week.

That's a lot of hours to work each week, and made worse when it became evident that he was only charging out about 25 of those hours.  Many of those missing hours were for peripheral activities but an integral part of the diagnosis and repair, like pick-up, delivery and installation, or on-site inspections.  

Why?  Because the customer wouldn't like it and wouldn't pay!   Or the repair would be more than the equipment's cost.  Never mind what that attitude was doing to the business, and to themselves.

And that is a problem when people in business don't look after themselves.  The stress and strain is taken out internally, and that is not good for anyone, or their relationships.  So there had to be a solution, a solution which meant that the customers are given good service and a fair deal, but one that provided a profit to the business. 

So what is the solution?

  • Charging a reasonable inspection fee so that the technician is reasonably reimbursed if the customer decides not to proceed with the job.  That gets rid of the value issue;
  • Tracking where the hours are going, and in particular the hours which are not being charged but which are a real part of the job;
  • Targetting recovering 60% of hours worked, not 40%;
  • Incrementally increasing charge out rates - keeping charge out rates down to keep the work coming in doesn't help if you are not charging the hours anyway.
  • Providing customers with a clear explanation of where the time is spent, and why that is part of the job.

A good job, well done with a clear explanation of the repair.

You can bill them that.

ag056fqthAdamG

 

 

"Businesses succeed because of high sales" - but is that right?

This was the opening line in an article in an Australian national newspaper last weekend.  The article began "Businesses succeed because of high sales.  Businesses fail because of low sales.  All else is commentary.  Nothing happens until a sale takes place, until someone sells something to someone. 

The most important single number in the operation of any business is cash flow."

Three fairly bald statements: the impact of sales, without sales there's nothing for a business, and the importance of the cash flow number.  Do you agree?

Here's my take:

  • Businesses succeed or fail because of sales - Wrong!  Think about it - yes you have to have sales but it is the gross profit that you make from that sale which will ultimately determine whether you succeed or fail.

    Gross profit is the key to profitability, the volume of gross profit that is, not just the percentage gross profit.  Don't get me wrong, the percentage gross profit is important but it is the volume of gross profit that lifts you above the break even point where you have covered all your fixed costs, and starts to contribute to profits. 

    No matter how high your sales are, if they are not profitable, or sufficiently profitable, you will fail.  On the other hand you can have low sales, but if your gross profit is high, you will succeed.  Businesses don't necessarily need high sales, they need profitable sales.  Much will depend on the market you are in.
  • Nothing happens until a sale takes place - Right!  A self evident truth.  In business you must receive the sale to start the process.  To re-quote the old saying "Business is what, if you haven't got, you aren't in!" Of course, those of us in the Cave might also raise the issue of consumption.
  • Cash flow is the most important single number in business - partially agree.  Plenty of profitable businesses have gone down because of poor cash flow.  There are many areas where cash can get trapped in a business such as Work in Progress, stock, and debtors.  If they are not operating efficiently in these areas cash can indeed be tight.

    And there are many businesses that are churning the cash around but not making much in the way of profits.  They may well be very efficient at keeping the working capital wheel turning, as they would have to be if their gross profit margin is low.

    Cash flow can be a very important, nay, critical number, but you need to know a couple of other numbers as well, such as profitability and efficiency ratios.

Adam GordonWhat do you think?

AdamG

Are you in control of your business if you don't understand what your financial statements are telling you?

If you are the captain of a sporting team there are a couple of key facts you have to know throughout the game if you are to make the right decisions and win the game.  And the key facts are both numbers:  what is the score and how much time is left in the game?  If you are losing, what do you have to do about it and how much time do you have left to do it?  If you are winning, how do you defend your position, and for how long?

The financial numbers in your business give you the business score, a guide as to what is happening in your business.  Just like the captain of a sporting team you have to make decisions about your business.  They may be short term, day-to-day decisions about pricing or purchasing.  They may be long term decisions about financing options, or whether to incur the cost of additional staff, or invest in new equipment. 

Which ever way you need the score, the financial information to make the best decision.  Decisions made when in possession of the facts are far more likely to be the right decision than those made by gut feeling and instinct.

The problem is that the years spent learning your profession or trade haven't necessarily given you the training to understand what is happening with the finances in your business.  As one client said to me "I know our product is good, and the customers appreciate our service, but I don't understand the books, and because I don't understand, I don't feel in control!"

To be in control you don't need to be an accountant, or even a bookkeeper, but you do need to have an understanding of what your financial information is telling you.

There are two key financial statements

The Balance Sheet shows your current financial position at a particular point of time i.e. the balance of what you own (your assets) and what you owe (your liabilities). 

The Profit & Loss Statement shows what has happened in the past, how you got to the position reflected in the Balance Sheet.  Are you making money or losing money.  If there is a profit leak, then from where is it coming?

The concept of working capital is one other bit of vital information you derive from the Balance Sheet.  It is essential to good financial management and tells you how much money you have to ‘work' your business.

Why is this important?

Knowing, and understanding the financial score is important for many reasons.  Hopefully:

  • your assets are larger than your liabilities, otherwise time might be running out in the business game;
  • you have sufficient working capital to pay the bills as they fall due;
  • your business is making profits, and not losing money;
  • your business is not leaking profits which you can't see

If you are losing money then your working capital will be going down, and the time may be coming when you can't pay your bills.  Or you may not be making as much profit as you should be, and so are struggling.

What to do if you don't understand?

For a start, don't panic.  Unless things are really bad you will have time to gain an understanding, and to make the right decisions.

There are always basic financial courses on offer and books you can buy, which will help you understand financial statements.  We will shortly be offering a module which allows you to self-assess your progress, with the option of some coaching.

You are the captain of the team.  Know the score in the business game and make the winning decisions.

AdamG

 

Most profit leaks occur because the business owner or manager just doesn't know they are happening.  Although that couldn't happen to you, could it?  After all, when you see a tap dripping, you turn it off properly.

But that is the problem with many leaks.  It is not always at the tap.  The drip, drip, drip can be in the pipe, somewhere.  So you don't always see them, or even know they are there, until you get the water bill.  Ouch!

Profit leaks are much the same.  If you see the leak, like nobody is responding to an advertisement, or a service is losing money, then you do something about it.  You might test variations of the advertisement to see what does work, or can it altogether.  Or find out why one of your services is losing money, and fix the problem.

All this predisposes one thing - that you actually know what is happening.  You are not going to walk past the profit leak - see it, fix it.

But what if you don't know?  Drip, drip, drip!  Like the water bill, you'll know when your accountant gives you your financial statements at the end of the year.  But then it is a little late, isn't it.

Let me tell you about one client and the situation he found himself in.  Bill had two main lines of business, and he could tell us exactly how much he sold in each line, down to the individual product.  He knew he had a profitable business, albeit not a very profitable one.  What he couldn't tell us was how profit each line of business made.  Not a problem he thought, after all he was making an overall profit.

And that was the problem - he didn't know.  With a little detective work he got to know.  The findings were as unexpected as they were unwelcome.  Line A was good and very profitable.  But Line B......Line B had a negative Gross Profit.  In other words it cost more to sell than he got from selling it, and that was with even looking at the overhead costs. 

The more Bill sold, the more he lost.  Now that is a profit leak.  And not knowing was definitely hurting Bill.  Do you know whether you are hurting through leaking profits?

What to do next:  By subscribing to the Profits Leak Detective's newsletter you will receive regular tips and guidance on how to avoid getting caught in the situation in which Bill was caught.

AdamGAdam Gordon

So what has a motor bike accident got to do with profit leaks, and one a long time ago at that? 

It was about 5.30 in the evening and light was fading.  Light rain was falling.  The road ahead stretched in a gradual slope for quite a way and the nearest town was some miles back.

At my feet was my motor bike, on its side, with broken front forks and a cracked front wheel hub.  It was not going anywhere.

Geographically I was about dead centre, north south, east west of the Asian side of Turkey.  And I thought, "there's gotta be a way outa here"

That was over 30 years ago and there was, courtesy of a Turkish truck driver who couldn't speak English but kept yelling "mort, mort" every time he saw an accident site (of which there were many), some repairs in Istanbul with an ancient BSA front wheel with no brakes left, replacement forks, and garden pipe to make bushes to fit the forks. 

The bike was and is my '69 Triumph which I still ride to this day.

So what is the business connection?  Just this - have you ever been in the situation when nothing seems to be working in your business: you're working hard, you're working long hours, no time off, and there just doesn't seem to be any money.  You feel like throwing the whole thing in. You know, just give up, walk away and to heck with it all.

That thought momentarily crossed my mind all those years ago in Turkey, and that is when the steely thought crossed my mind - ‘There's gotta be a way outa here!'  I listened, and held onto that thought.

And so it is with the hard times in your business.  There is always a way.  You've just got to find it.  Something is tying up the cash, or the profits are leaking.  Look for the clues, find the leaks, and plug them.

About 10 years ago I had a client who was perpetually short of cash.  They had grown from 3 young blokes starting a business to about 45 people, but cash was always a problem.  They lived on the edge the whole time.  It was hard work, and very stressful.  It took a change of General Manager to recognise that their profit leak was that their business model was wrong.  It was OK for a small market, but not for the size they had become.  They were in the wrong market with the wrong model.  It just leaked profits from the investment in time and money they were making.  They now have over 2,000 employees and operate in 4 countries.  They found a way ‘outa here'.So click here now

As for how I busted the forks and front wheel - that's another story. 

If you would like to comment on this please contact me

Adam GordonAdamG

I wanted to comment further on the ‘customer service system' of which we spoke in the previous blog.  And to support that I found a quote that really said very effectively the point I was trying to make.  But before I get to this I just wanted to discuss the importance of the perceptions that customers form of our business.

The perception that the customer forms of your business's ability to satisfy their expectations will determine their response to the actual goods and services they receive from you.  Unless your customer's needs and preferences are satisfied the image of your business, in the mind of your customer, may be quite different from the identity you believe your business has.  This is sometimes referred to as a "Moment of Truth".  Every time a person comes in contact with a business they form a perception of it.

And now to the quote:

"It is commonly accepted today that meeting customer expectations on quality and service is merely a ticket to play the game.  The long-term winners are those organisations which consistently exceed expectations or delight their customers with cheaper, better products and services that are delivered faster.  Too often however organisations, particularly in service industries, striving to provide better service than their competition, focus their attention exclusively on the people and practices at the interface with their customers.

This attention is usually in the form of customer service training supported by a number of customer service measures.  The training, at worst, takes the form of so-called "smile training".  At best it equips frontline staff with the knowledge and skills to deal quickly and pleasantly with customer queries, problems or complaints.

Neglecting the processes and support functions behind customer service staff is often the cause of many service improvement initiatives stalling.  Frequent delays, errors or inefficiencies in the processes that deliver the end product or service to customer service staff, eventually lead to frustration, demotivation, and a reluctance to take the initiative. 

Even the best customer service training soon begins to lose its impact and as customers complain, managers lament the wasted investment."

'Achieving Service Quality'   Rod Smart, General Manager, Zenger-Miller Australia.

I couldn't have said it better myself. 

Note the comment on "managers lament the wasted investment".  I don't have to tell you what a wasted investment is; another profit leak.

Adam GordonAdamG

 

A little while ago I wrote of the role of management in customer service.  Today I thought I'd touch on the overall customer service system. 

What do I mean by "system" ?  Think of how you actually deliver customer service.

There are two aspects of customer service.  The first is what the customer experiences when they come through your door, or contact you by telephone, facsimile, e-mail or what ever.  How were they treated?  How quickly did you respond?  Were they happy with the service or product they purchased?  Will they come back?

Your front line team provides this point of contact and it is critical.  Friendly, smiling staff who genuinely want to help your customers, answer the telephone quickly and go out of their way to meet the customer's needs are invaluable. 

We recently did a customer survey for a client.  One item which stood out in all the customer's responses was the attitude of the staff.  We identified other opportunities for improvement but it was the strongly customer-focussed attitude of the staff which kept the clients loyal.

However there is another aspect of customer service, and that is - "How do you enable our staff to provide good service?"  You can recruit nice staff, provide frontline training and set the right example.  However if the systems and processes behind the scenes which enable your staff to identify the customer's service requirements and to provide that service aren't working, then that smile might have the be stitched in place, because they certainly won't be able to hold it there.

Customers have needs and expectations (quality, timeliness, price etc.) which must be determined.  To a certain extent you react to these when they walk through the door, but how much better is it if you have done the work to determine what they are likely to be before they arrive, thus considerably improving our chances of satisfying them.

The company's system makes claims and promises regarding its ability to deliver its products and services.  But can you actually find the product when it is required?  Does the system say you have Item X in stock but it cannot be found?  Can you fill 100% of an order, or only part of it?  Can you provide the support they need when they need it?  These are the "business processes" which underpin your business.  Can they work better, faster, with fewer mistakes and errors? 

It is these business processes you need to work on if you are to improve customer service - to enable your staff to provide the service level which will ensure loyal customers.

Finally, no matter how well the system believes it has performed it is the customer's perceptions' of quality which determines whether they are satisfied.  Staff have key roles in shaping those expectations through their advice, service and the nature of their relationship with clients but in the end, the customer walks out an unhappy customer, you have failed. 

And you need to know.  Measure, measure, measure!  An unhappy customer represents another profit leak.

r& i ag2AdamG

 

Ice?  We're worried about leaks are we not?  Well, yes, we are, and I suppose if I stretched a point I could say we are worried about running into an iceberg and creating a leak.

Actually, the metaphor is not bad.  We are talking about the impact on profits of something we usually don't see.  You know how it is said that you only see the one third of the iceberg that is above water.  Two thirds is under water so you don't see it, and that is where the danger lies.  That was what happened to the Titanic, and you don't want the kind of leak it got to happen to your business!

In this case the iceberg is waste.  The bits you see you can do something about, and usually do.  Things like scrap and rework if you are in the manufacturing business, customer returns or servicing complaints.  I'm sure you not just fix a specific issue but also look at the trends to see if there is an underlying problem.  You do, don't you?

It is the two thirds you don't see that is the problem.  If you are not using your equipment properly and not getting the best out of it, that's a waste.  If you are having to pay premium freight costs because some parts or supplies were not ordered on time, that's a waste.  If you are making sales calls on people who are never going to buy, or at best buy very little, that's a waste.  If you lose a customer for whatever reason, that's a waste.  It costs more to get a new customer than to service an existing customer.  If you are not concentrating on those things that are most critical to your business, that's w waste. 

You get the picture I'm sure.  Just as a test, for today.  Why don't you do a check every hour or two and look at what you are doing, and how long you have been doing it.  The ask yourself the question "Is this adding real value to the business?"  If not, is that the best use of your time?

The proportion of waste that is hidden will vary from business to business.  In manufacturing businesses the waste tends to be more visible.  It's above the water.  However for service businesses it tends to be much higher, and can be as high as 10 times that which can be seen.

Whatever the form of the waste, you are not recovering a dollar from it.  So it is a profit leak.

r& i ag2AdamG

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