And how to get future business

"It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness" - as Charles Dickens' famously opened 'A Tale of Two Cities'.

It comes to mind as I was reflecting on the performance of two different tradesmen we've used in recent times, and the small business lessons that can be learnt from that experience.

One tradie, let's just call him Austin, I found by word-of-mouth.  As you will know, word-of-mouth is the most powerful medium for promotion. But, like respect, it is something that must be earnt, not just given.  That's important, because in this case I trusted the referral, and didn't get competitive quotes.

Austin came promptly to inspect the job, and to start it when awarded.  The job was done professionally and without any fuss or bother.  There were no delays, no stop-start as can so often happen when you're looking for a tradesman.  I was pleasantly surprised when the bill came in a little below his initial estimate.  I was even more pleasantly surprised when, without being asked, I was given a complete breakdown of the bill in hours and materials.

And then there was Nelson.  There wasn't much wrong with Nelson's workmanship.  It was his attitude, and his approach.   Nelson had a problem.  Planning was an issue.

Lack of planning lead to a lack of time.  Lack of time led to short cuts, to things not being done properly which, when spotted, had to be redone. 

It also led to an attitude that we, the client, by insisting on things being done to specification, were trying to take him down, to short-change him.  As a client, an attitude like that leaves a bad taste in my mouth.

What can we learn from this little tale?

Well quite a lot really.  But first some basics:

• Customers are the lifeblood of every business. If you don't have customers, you don't have a business.
• A successful business model is one that focuses first and foremost on continuing benefits to the customer, the customer and the customer.
• Most businesses make real money only on repeat sales. While an advertisement may make a prospect hopeful enough to try your service, it can't make that customer delighted enough to buy it again. Only you and your service can do that.
• Harvard Business School research has found that a 5% increase in customer loyalty can lead to 40% to 90% increases in the lifetime value of that customer relationship.
• The referred customer is most likely to become a source of more referrals. He got there as a result of a referral so he's already been conditioned to refer. The more you use these strategies the more profitable your business will be. Dan Kennedy

A bloke called Ray Kroc once said 'If you work just for money, you'll never make it, but if you love what you're doing and you always put the customer first, success will be yours.'  

Who was Ray Kroc?  He was an American businessman who took over a small-scale franchise way back in 1954 and built it into the most successful fast food operation in the world - McDonald's Corporation.

So to the lesson:

• Look after your customer and you'll get repeat business.
• You'll make more money from repeat business.
• Repeat customers are more likely to give referrals and testimonials.
• Referrals and testimonials are the most effective way to get new customers.

Now in my tale of the two tradies which is more likely to get a referral or testimonial?

© Copyright 2009 Adam Gordon, Profits Leak Detective

If you are looking on-line, so are your customers.

Traditionally when you wanted to find a product, or a supplier the first thing you would have reached for was the Yellow Pages Directory, or some smaller equivalent.

I say traditionally because there seems to be increasing evidence that small businesses are moving to Internet media as a more effective way to attract potential customers and grow their business. For example:

• The number of people who use the Yellow Pages print directory less than once a month or don't use it all has increased by 55% between 2002 and 2009. (Roy Morgan Single Source Australia: January to March 2002 to 2009)

• SBwire reported on 23rd August this year on a survey by the Australian Bureau of Statistics, relating to business use of information technology which showed that proportion of businesses with Internet access via broadband connections was 82.5% in 2005-2006. That was a significant increase by 32% from the previous year. Australian businesses are clearly making huge inroads on the Australian online media.

• Sensis® e-Business Report 2009 showed of those SMEs that are connected to the internet, 96 per cent now have broadband connections, up from 94 per cent last year. With 26 per cent of Australians now using their mobile phones to search on the internet, with searching for information on products and services, using social networking sites and looking for suppliers of goods and services the most popular usages.

• In the US it is suggested that Google's (and the other top search engines) innovations in local search combined with increasing inclusion of business listing data in the Search Engine Results Pages (SERPs) is causing users' behaviour to change. Users are finding more and more of the information they're seeking directly in SERPs, negating the need to find Yellow Pages.

• Australian directories such as Myboot.com.au report an increased number of business listings from tradesmen such as electricians, plumbers, handymen, home renovators and builders, together with removals and builders categories.

Does this mean that the traditional Yellow Pages director is heading for extinction? To be fair, the Yellow Pages people claim increased usage.  As they would.

So what's the answer for your business? Well, there are two things to check.

And you will find life a lot easier!

With over 20 years working with small business to help them improve their profitability a number of issues stand out that hold small businesses back.  Not addressing them won't necessarily lead to failure, but you will certainly work harder, be more stressed and less profitable than you need to be.  

How would you rate your business against these five areas? Why not take that question a step further; give yourself a score out of 5, where 5 is excellent and 1 is "hopeless".  

1. Not managing your cash flow - do you manage your cash flow via your bank statement?  No idea of where the cash is tied up in your business or how you could do more with less?  Not being able to pay your creditors because your debtors are not paying you.  Too much slow moving stock tying up cash which could be used for faster moving stock.  No cash flow budget.  Remember cash flow and profitability are two different things.

2. Not understanding your financial statements - can you really have control of your business if you don't understand the messages your Profit & Loss statements and Balance Sheet are giving you?  Is the profitability of some product lines or services disguising the losses of others?  How do you know?  Are some customers more profitable than others?  How do you know?  Are all variable costs recovered from the customer who incurs them, or from overheads at the expense of your profits?  Who is funding your business; you, the bank or your creditors?   Which key ratios do you use to measure your financial health?

3.    Not having a plan - Do you know where you and your business will be in three years?  Or do you have a focus on short term day-to-day issues, rather than a long term objective?  Are your trapped in being busy being busy, and going nowhere?  Are the decisions you make based on those day-to-day issues, or getting you where you want to be?  It's like pounding away on a treadmill, and where do treadmills go?  Nowhere!

4.    Haphazard marketing - Yellow Pages ads placed every year with no real thought, no measure of how many sales they generate.  Ads placed at random in the local newspaper, radio or TV.  Does your message match your market?  No thought-through core marketing message or understanding of what makes your business unique, no marketing campaigns.  Your target market is "everyone", but are you in markets which don't perform as well as others you could be in?   How much repeat business are your getting?

5.    Not having business systems and operating procedures - Have you noticed that all good businesses have good business systems and procedures?  How much time do you spend each week redoing things that weren't done properly in the first place?  Or telling someone how to do something that you've told them before, looking for something that wasn't put in the right place?  It's frustrating but it's also a waste of your time, and your money.  And it's all because of a lack of documented systems and procedures.  Is "we've always done it this way" good enough today?

So how did you go? Is there an opportunity for improvement in your business?  Avoiding even one of these mistakes will make a difference to your business, and to you.

If your would like to think about these issues a little further then our free E-Book, "7 Clues to a Profit Leak" looks at these questions and others.


© Copyright 2009 Adam Gordon, Profits Leak Detective

Shouldn't it ?

Just how do you arrive at your selling price? Do you follow a formula, taking the cost of the product you're selling and adding a margin - 20%, 33%, 50%, 100%?  Do you have a pricing strategy or policy?  And is it based on your costs, or your market?

Many small businesses base their prices their costs plus a margin. Those that don't usually base their prices on what the competition charges, which is even worse, but that is another story.

What do you do?

There are problems with this pricing strategy:

• The price has no relation to what the market will bear. You could well be leaving money on the table, or losing sales because the market doesn't agree with your price.
  

• Do you know your costs accurately? Many small business accounts do not accurately separate variable and fixed costs. If your mark-up is to be accurate you need to know this. A mark-up based on inaccurate costs is meaningless.
  

• The gross margin you show on your product will certainly not be the same as the gross margin on your income statement.
  

• Profitability is measured as a percentage of sales, not as a percentage of costs. For example a mark-up of 50% gives a gross profit of 33.3%.
  

• It assumes that the customer has some idea of your costs.

There are two foundations to an effective pricing strategy and they are both based on knowledge: knowledge of your costs, and knowledge of your market.

Mark-up prices are based on the direct (variable) costs of a product or service, that is, on what it costs to acquire or manufacture the product.  So you buy a widget for $100, mark it up 50% and sell it for $150.  But are there other costs associated with the cost of the product such as:

• Delivery to your customer
• Warranty
• Commissions
• Consumables

Many of these costs are often buried in your overheads. If so, part of your mark-up must go to recovering them before contributing to your overheads and, once you've got past the break even point, to your profit.  The point is they're variable, that is, the more you sell the more you incur.   Fixed costs are just that - fixed.  The more you sell the more your margin contributes to their reduction, the quicker you get to your break even point, and the quicker the profits roll in.

For the profits to roll in you need to know your cost structure - accurately.

Your price should be a market price, not a cost price.

Your customer is not buying your product on what it costs you. He or she is buying it on the value it will deliver to them.  Will it save them money?  Will it overcome a problem, fix something?  Will it relieve the pain?  Will it enable them to do something more quickly, or more easily?  There's a value on that.

What is that value worth to the customer, because that is what they are willing to pay.

Understanding your market place and the problem your product really solves for your customer, and the value it delivers is critical in have in an effective pricing strategy.   And if you can't deliver that value at a cost that leaves you a profit, then you should ask yourself whether you should be in that market.

A pricing strategy based on a percentage mark up will only be sufficient accidently.

© Copyright 2009 Adam Gordon, Profits Leak Detective

The perils of profitless cash flow!

It's a situation that happens quite often in business; the profitability of some operations or products disguises the lack of profitability of others.  In a newsletter last year I wrote of a client, a business with a number of small profit centres.  Whilst the business was profitable overall about 70% of the small profit centres were losing money.  Now is that a profit leak or what?

A quick sum suggests most of these would need to increase sales by more than 33% to just break even, with one needing to increase by more than 120%.  That sounds like pretty hard work to me.

Maybe increasing gross profit is not as hard? I'm a great believer in the power of gross profit. So we ran a 'what if' on increasing gross profit in each profit centre, but that didn't help much either.  A significant lift in sales was still required.

The problem for my client was that these small profit(less) centres produced a steady stream of cash, unlike the profitable centres where the cash flow was extremely lumpy.  I learnt many years ago that cash flow is king.  You can't pay the bills without cash, no matter how profitable your business.  But there is an inherent difficulty in considering cash as being more important than profit in the longer term.

Cash coming in is all very well but if a business is losing money then with each turn of the working capital wheel a bit is shaved off.  You start with $100, it goes around and comes back as $99, around again and you have $98, and so on.

It's not exactly the way to make you flush with funds. You need a margin on the top that goes into your bank account for that.

What would you have done?

If neither increasing sales nor gross profits will change the situation then maybe the company is better of without those particular profit centres.  "But we need the cash flow from them to pay the bills" I'm told.  I've seen it before, people hanging onto operations despite profitless cash flow.

It is easy to say just close the unprofitable centres, but that doesn't solve the problem of the required consistent cash flow.

Well, negotiate an overdraft with the bank.  After all that is what overdrafts are for, to allow businesses to even out the irregular or seasonal variations of income.

What are the options?

An overdraft is an easy solution, but are there others?  It's always worth looking at all the options before adding debt, particularly in these troublesome times.

Evaluating options requires a good hard insightful look at all your strengths, all the positive things that underlie the successful side of the business.  For example is there a market, a profitable market for your underlying skills, a market which will produce a consistent and positive cash flow?  Is there value for others on how you do something, as well as what you provide?  Solutions that would allow the irregular but profitable operations to build the bank balance quite nicely, rather than replenishing the sieve-like profitless operations.

In this case our client both plugged the profit leaks by closing or selling off the profitless centres and built a new profitable profit centre around their underlying skills.  They developed a valuable product around how they did what they did.  And the cash flow it provided is both consistent and profitable.  The bank balance is at last building.

Profitless cash flows will imperil your business.  Profit leaks can be plugged.

If you would like to discuss how to identify and plug profit leaks in your business, please contact me.

© Copyright 2009 Adam Gordon, Profits Leak Detective

King Canute isn't dead!  

Or at least the type of action which saw him whipping the waves to stop the tide coming in isn't dead. A short article in my local newspaper recently suggested that the Internet was a threat to local businesses, taking sales which in its absence they may have won.  It went on to urge people to shop locally.  

I'm sure people will shop locally, unless they can get a better deal somewhere else. Somewhere else may be the shops in a bigger town with more variety and more competitive prices.  

Somewhere else may also be the Internet.  

While the Internet may be a threat to local business you can't ignore it.   To do so just condemns your business to on-going profit leaks.

Like it or not, the Internet is not going to go away. All the stats show that using the Internet to buy goods and services has been growing dramatically, and is forecast to keep growing.  World Internet usage statistics as at March 2009 report that Internet penetration as a percentage of population in Oceania/Australia is 60.4%, second only to North America at 74.4%.  By comparison Europe is only 48.9%.  

New data from the U.S. Census Bureau show that 62 percent of households reported using Internet access in the home in 2007.  It will only have gone up since then.  Australia is not too different from America, and with the increasing broadband speed promised under the National Broadband Network access is only going to get faster, and easier.

Sure, you can appeal to people to "go forth and spend" locally, but that is only like King Canute whipping the waves.  I doubt the Internet tide can be beaten into submission.

So how do local businesses compete?

Being well stocked and competitively priced is only part of the response as the article suggested.  The article touched on lack of after-sales support from an e-commerce site.  That is true.  A provider based in another country can't provide the support a business just down the road can provide.  There's a strength that you can build on.  

But you must do more than just provide good customer service. You need to tell your prospective customers about the products, the service you provide, and the support that is readily available.  

There are always two faces to every threat.

Look at the Internet from a different perspective.  It is also an opportunity.

As the old saying goes, the best form of defence is attack.  That calls  for some good marketing.  Marketing wasn't mentioned as a strategy in the article.  As another old saying states, "Being business without marketing is like winking at a girl in the dark.  You know what you're doing, but nobody else does."

Why not come in with the tide and develop your own website as a key element of your marketing strategy?  

Developing a simple website need not be expensive.  After all, what do you spend on Yellow Pages ads?  And do you really know how many sales result from them?

Having a website doesn't mean you are selling to the world.  There is no reason why it shouldn't be targeted purely at your local market.  Research also shows that along with increasing household (and business) usage people are increasingly going on-line to research their requirements.   Most of your prospective customers are turning away from traditional places such as the Yellow Pages and towards the Internet, simply because of the depth of information it can provide.

But your site must be more than an on-line brochure - a waste of time and money.  You must tell prospective customers about the problems you solve, and give them a good reason to come to their local business.  Make them compelling offers.

The tide is not for turning. Don't ignore the Internet.   Turn it into an opportunity and plug that profit leak.

© Copyright 2009 Adam Gordon, Profits Leak Detective