The one to provide "the right advice"

• Making the right decision requires expertise, knowledge or a skill in the area you are seeking to procure;
• As a business owner or manager I would be willing to bet you don't have a lot of free time. Time is usually even more scarce than capital.
• In most areas there is an ever expanding sea of choices.

So what do you usually do?

For most of us the natural thing to do when we are faced with making a decision of some significance to our business is to go and find the specialist, the expert in that particular field.  You could go to a generalist.  A generalist will have some knowledge in a lot of areas.  The expert will have in-depth knowledge in a specific area.

Experts don't become expert overnight. They become expert because of the time they have spent working in that particular area.

And because of the time they have spent in that area, they have found all the tricks and traps.  They have probably made all the mistakes, and learnt from them, the mistakes that you are likely to make venturing into the area for the first time.

When you have a specific need, who are you more likely to go to?  If it is a simple problem it is quite likely that the generalist can help.  But if your requirement is complex and/or expensive then the specialist, the expert is the one you will turn to.

There is another factor to consider here. As the range of choices you face expands, businesses start to specialise more and more in specific areas to give themselves an advantage.  Niches get narrower and narrower as people seek that point of difference that will make them stand out as the expert, as the ‘ones to go to".

Which leads me to my final point. What does this mean to you?  Have you established recognition as the specialist, the expert, the business to turn to in your market?  And if not, why not, and what do you have to do to become so?

Is YOUR break-even broken?

Break even is one of those useful tools of which most businesses don't make sufficient use.  At its simplest knowing how much you need to bring in as income each week or month gives you a good guide as to the sales levels you need to target.

And if you set the target then you might just decide to think through how you will achieve that target.  Well, that's better than veging out and just letting it happen, isn't it?  Of course you can be a little more sophisticated than that and make your averages subject to the seasonal variations of your industry.

But break even is a much more useful tool than that.

As we said in an article we posted last year ("What is break even and why is it so important?") you can use break even analysis to test:

• Pricing
• Quoting
• New Investment
• Cost justification
• Setting sales objectives
• Product Line analysis
• Profit planning

It is both a management tool and a marketing weapon.

Easy to say and in fact, as the above article points out, it's not too hard to use.    But what if the costs on which you base your calculations are wrong?

This is why the issues raised in the last few blogs about misallocation of costs and not knowing your real costs are so important.

Put simply, if the figures on which you base your analysis, whether it be for marketing or for management purposes, are wrong, then your analysis will be meaningless, if not misleading.

For example:

• Misallocating variable costs (cost of sales) to overheads will lift the fixed cost level you need to recover before you break even. And if your pricing is based upon a margin above costs, then you will have also reduced the actual margin available to recover those fixed costs; a double whammy.
• Not knowing your real hourly cost rate - As we said, if you don't know your costs, then you don't know your profit margin. And if you don't know your margin you don't know how much profit you could, or should be making. .

In neither case will you know how much business you have to do for the year before you start to make a profit for the year.

And if you don't know that, then you can't develop a soundly based strategy to improve profitability for the year.

That's an awful lot of "don't knows".  And no way to run a business!

You could be in for a nasty surprise!

Problems can arise when you don't know your cost of sales as discussed a couple of blogs ago. If you don't know your costs, then you don't know your profit margin. And if you don't know your margin you don't know how much profit you could, or should be making.

I suggested that if you were in this situation then it is quite likely that your business is leaking profits without knowing it. It's a little like the children's game of pinning the tail on the donkey while blindfolded.

The main example I gave was the incorrect allocation of costs. If an item which is truly a cost of sale is not allocated to that sale, whether it is left languishing in overheads or not picked up at all then you won't recover that cost against the sale that incurred it: truly a profit leak.

Can it get worse? Unfortunately it can, as a client recently found only too well.

If you are in a trade related business what is usually the largest element of your cost of sales? For most of you it will be your labour cost. And if you really don't know your labour cost you probably have not even got the tail, let along be able to pin it on the donkey.

Unfortunately many small businesses do not sit down and make the simple calculation to determine their real cost of labour. By that I mean working how much time they have available to charge out for each employee clocking chargeable time after allowing for annual leave, sick days, holidays and of course, some allowance for efficiency.

To their salary has to be added the direct costs of employing these staff, (and these are Australian costs), allowing for superannuation and workers compensation insurance, which gives you the hourly cost of employing those staff.

That is not the end of the story of course. Each hour charged out needs to recover its proportion of overheads, and then of course, make a contribution to profits.

Okay, bring that together and what do you get? Unfortunately, as I mentioned, many small business owners and managers do not do this calculation. Instead they rely on using a charge out rate their mate down the road charges, thinking no doubt that he has worked out his costs.

He may or may not have, but his costs are not your costs.

Does it matter? Well in two recent examples it did. In the first example our client found out that the difference between the total cost per hour and the actual charge out rate, i.e. his profit margin, was so small that even a small overrun in time, or misallocation of costs, would result in a loss on that job. So he was not making his money there.

Even worse, in the second example, our client found that the actual man-hour cost rate was much higher than the charge out rate. In fact it was to the extent that the business was losing money on every hour it charged out. Although it hadn't known this, the company was relying on its mark-up on materials and sub-contracts to make a profit!

Is that a satisfactory situation? Should your business's profits come from the mark- up on purchases, or on the expertise and skills you bring to the job?

© Copyright 1998 - 2009 Adam Gordon, Profits Leak Detective

And to where are you directing your marketing message?

Picture this: you see a mountain reaching up into the sky.  It may be a gentle, rounded mountain or one of those jagged peaks.  Running down from the mountain are the slopes, stretching down gradually to the plains below.  And the plains slowly run on to the sea.

Your customer base will be something like that. There will be a group of customers who provide the majority of your sales and profits, they are the mountain, making up the bulk in dollar terms of your revenue.

Then there are those who buy less frequently, or in smaller amounts, but are still regular customers.  They are slopes of your customer mountain.

And lastly there are the plains stretching out to the distant sea, that great mass of customers who may comprise the bulk of names on your customer base, but in fact buy very little and do so only occasionally.  In marketing terms, particularly in these days of e-marketing, they are known as the marketing ‘tail'.

When you promote your products or service, to whom are you promoting? The whole landscape, (i.e. everybody), or to the mountain, the slopes or the plains.

Let me ask you which landscape is going to give you the best return on your promotional dollar?  As a small business my assumption is that you do not have unlimited dollars for promotion.  I guess the corollary question at this stage is whether you actually measure the return you are getting now from your promotion.  But that is a question for another day.

If you spend $500 on a promotion from the mountain to the sea, your promotional message will be about everyone, and no-one.  The first thing any potential buyer looks for in any promotion is WIIFM (what's in it for me). Because your ‘landscape' message will of necessity be general no-one will be able to say "that's me", and be enticed into your message.

On the other had if you target a particular part of your customer base, and direct your promotional message specifically to their needs, they will be much more likely to say "that's me".  And if they can say "that's me", they will be much more likely to buy.

So now ask yourself: who is more likely to buy; those customers on the mountain who buy from you frequently, or those who may only do so occasionally, and for small amounts at that.

© Copyright 1998 - 2008 Adam Gordon, Profits Leak Detective