Sometimes we lose sight of the difference between margins and sales.  

The margin we make over the cost of providing a product or service is the money we have to contribute to pay overheads (relatively fixed) and then when we have covered those, to our profits.  

I'll talk about breakeven another time but this time I wanted to touch upon two examples where it is easy to get confused by the impact of sales versus margins.  These are bad debts, and promotional campaigns.

Lets take bad  debts first.  Of course this does not apply to you if you get cash payments on delivery, or better still, payment before delivery.  A significant proportion of businesses invoice their clients on delivery of the product of the service.  Your Terms of Trade may vary anywhere between 7 days to 6o days.  Here I'm talking about when you require payment, not when you actually get paid.  Unfortunately we often find that the bigger the client, the slower the payment.  So what happens when we have a bad debt?

Say your sale was $1,000 and your Gross Margin was 35% ($350).  The sale goes bad for what ever reason and the client does not pay.  Now it is easy to assume that you have to make another sale of $1,000 to recover your position.  Easy to assume, but wrong!

To get back that $1,000 you have to make enough profit to get the money back, because a significant proportion of the new sale will, as before, be the cost of providing the cost or service.  And that amount we can calculate by dividing the sales figure ($1,000) by the Gross Margin (35%).  And that gives the princely sum of $2,857, all of which ignores the cost and effort of achieving the new sale.

So it makes sense to set yourself up so that this situation does not arise.   Policies and procedures help, as does getting paid up front, or at least a reasonable down payment.  In these days of multiple credit cards, securing a credit card imprint can be useful.  In other words get the client or someone else to cover the debt.  You are not in the banking business.

And so to promotional campaigns.  Much the same situation applies, except that it is harder to measure.

If you do decide to calculate return on a marketing campaign: when comparing cost to returns, "returns" should be your profit not your gross sales. If you spend $1,000 on a marketing effort and generate $1,000 in sales, you are losing money; you are out the cost of product or services that you sold for $1,000.  You have only broken even on a marketing campaign that costs $1,000 when you have sold enough product or services to generate a $1,000 PROFIT.  How much sales that requires depends completely on your products and your profit margin.

AdamG

The two blokes below me looked like they were statues in some frozen tableau - frozen in the squat position, arms thrust out in from of them and only inches from where a screaming, roaring monster was going materialise.

We were in the corporate box of a supplier at the V8 Supercars and directly over the pits.

For the benefit of non-Australian readers I should explain that the V8 Supercars is the main automotive racing circuit in Australia.  The cars, in theory at least, are based upon standard sedans, but heavily modified for racing.  The heavy modifications replace just about everything apart from the name badge, but you can still see the family resemblance.  The circuit includes most Australian capital cities and, for the first time this year, they will also be racing in Shanghai.

I guess you have to be a bit of a petrol head to be able to take the noise, but there are compensations, like the hospitality we were offered, and the networking opportunities.  But that is not what I want to talk about.  Rather both my wife and I were struck by the performance of the pit crew in the bit directly below our box.

Most of the pit crews dashed to their car as soon as it came into the pit, wielding their tools and changing a tyre in unbelievable speed.  I said "most of the teams" and ‘dashed".

The team below us were in a minority of one, and didn't dash anywhere.  Instead, they were already in position, crouched at wheel height and ready to move.  One held the tyre off the ground (you try that even with a standard auto tyre) ready to thrust it on the wheel, the other also crouched down, with his pneumatic tool ready to get the wheel off.  So they didn't need to move.

The car would come in, one step forward by the tool holder and the wheel was off, one step forward by the wheel holder and the tyre was on, another by the tool holder and the wheel was secured.  And the car was off.  It was very impressive. 

But what really struck me was that they had a system, their system was far superior to the competition, they worked as a team and they had obviously had practised until they had the whole thing down pat.

Many of us have played sport, particularly team sports and will remember well the endless drills to make sure we knew our moves and could carry out the team plan perfectly when we get on the field or court.  So why don't we practise our moves and teamwork in our business to deliver speedy, great results?

Good businesses do.  That pit crew reminded me of a client we worked with a few years ago.  They were fabricators, making products for the housing industry and we were asked to help them do a business plan which would transform their business.  In preparing the plan we did a customer survey, and that was when the ‘ah hah' moment occurred.

One question we asked related to the importance of ‘on-time delivery'.  We had defined this in terms of a specific time e.g. ‘10.00 on Tuesday morning', and not just ‘Tuesday morning'.  That turned out to be the critical question.  You see, the company didn't think it particularly important.  In fact they ranked it about 10 in a 1 - 10 list of service criteria.  The customers however, ranked it 1.  So what chance did the customers have of getting on-time deliveries in that situation?

Let me tell you that the system they designed as a result in their business plan was designed to give customers on-time delivery, every time.  They really worked at it.

And, like the pit crew below us, they consistently beat the competition.

It may be a presentation, carrying out a service or doing an installation.   Develop the system, and practice it.  Practice makes perfect as the old saying goes.  Improve that presentation, practice closing a sale - they all prevent profit leaks.

You know what it is like when you get the ‘flu

 - splitting head, runny nose, cough, sore throat, congested chest.  All very unpleasant, and not helped by knowing there is no real cure.  What you are experiencing are the symptoms.   The underlying problem is deeper and probably needs antibiotics.

It is however important to treat the symptoms.  I well recall my doctor explaining that this does make a different.  When the body no longer has to fight the symptoms it is much better placed to deal with the underlying virus.

When your business is leaking profits there are usually a number of distracting symptoms.  Very often they are perceived as the problem whereas they are really indicating that there is an underlying problem. 

The symptoms may include shortage of cash and having to deal with angry creditors chasing payment, very wearing and stressful when you just don't have the money to pay them.  Sometimes in a small business owners find themselves not taking a full pay in order that their employees can get their pay.  Other symptoms can include lack of time; you're running from one crisis to another, putting out fires.  So you don't have time to put your head up over the parapet to see what is happening with the business.  They may also include equipment breakdowns (no maintenance), continually correcting paperwork (no procedures, no time for training so more mistakes), and things creeping up on you unexpectedly because you have been distracted from thinking ahead.

While the ultimate answer is dealing with the underlying problem - identifying and plugging the profit leaks so that you are making an appropriate profit, dealing with the symptoms can help.  Dealing with the symptoms may give you time and resources to get an and solve the underlying problem.

For example, just putting in place a proper procedure for dealing with debtors and speeding up payments may help solve the creditor problem.  That alone will make life easier..

It was very nice to receive a call from an ecstatic client yesterday to tell me that she had got her debtors under control.  The monkey was of her back.  The relief and joy in her voice was a reward in itself.

AdamG

I'm glad you asked!  Let me recount a problem I had a while ago with my water bill. 

Darwin, where I live, is in the tropics.  So we essentially have two seasons only, commonly and somewhat unimaginatively known as the Wet and the Dry. During the Dry we can go for 5 - 6 months without a skerrick of rain, but the weather more than makes up for it during the Wet.

A tropical storm is a wonder to behold, towering thunderheads, incredible lightening.  Darwin supposedly has more lightning strikes each year than any other city, anywhere.  NASA has even sent special aircraft out to study the phenomenon.  But I digress.

As there is no rain during the Dry (obviously) if you have a garden you need to water it.  Most of us install automatic reticulation.  So the reverse applies during the Wet, and we turn our reticulation off.  Bear with me, I'm getting there.

We are billed quarterly. If we were billed monthly I might have picked up the problem earlier.  (Hint - that is why you need to look at your accounts and other KPIs on at least a monthly basis.)    It was a Wet Season bill, and my bill was more than double what I was expecting.  Why was it so?

There were no leaking taps, water spurting or even dripping anywhere, either in the house or in the garden.   No lush green patches.  Being the Wet the garden was all lush and green.  So where was the problem, had how did I find it?

In the end I found it by accident, treading into a very mushy bit of garden.  But that was pure luck.  I would have found it eventually, by careful examination.  And underneath the mushy bit was a split pipe, from whence all the water was leaking.  But finding leaks by accident is just not good enough.

And that is the problem you may have in your business.  Sometimes the leaking tap is pretty obvious.  A particular line, or activity is obviously costing you money.  If you can see it, youcan do something about it.  But what about the times when you don't know profits are leaking.  You don't know until you get the quarterly, or half yearly or, even worse, the annual figures.  Because by then it is too late.   The profits have leaked.

Sure, you might then plug the leak, but what is gone is gone.

So maybe you need to be a profits leak detective to find out if there is a leak, and to do something about it.  Are there aspects of your business which are not doing as well as they should?  Hidden leaks.  Are you in markets which don't perform as well as others do you could be in?  Do you really know your Cost of Sales?  If you don't, I'd be willing to bet you are not covering all those costs, and are writing them off against overheads. 

The leak could be anywhere.

 AdamG

 Customer service is one of those issues that keeps on being raised. 

People emphasise with me how much weight they place on customer  service.  But there are really two issues here.  Lack of both can cause profit leaks.  They are front-line customer service and - "How do we enable our staff to provide good service?"  Do you have a customer service strategy?

Where should "customer focus" - a customer service culture, start?  I would suggest it starts at the top.  This is the role of leadership. 

In an article some time ago in Business Review Weekly , Professor Paul Rizzo, Dean of Melbourne Business School said, "To achieve sustainable competitive advantage in today's fierce market conditions, companies cannot ignore their customers.  Strategy, systems and people must be built around satisfying customers" (my emphasis).

Customer focus starts with choosing markets and competitive strategies which maximise the core competencies of the business - after all, you are more likely to be able to provide good customer service if you are in a market place whose requirements you have the skills to meet.  Otherwise your sales could be costing your profits!

It also means selecting customer groups and market segments (for example, strategic, profitable, significant) and finding out what is important to them.  Having done that, you might wish to develop value propositions that add value for each of these groups or segments.

You might need to determine not only current customer requirements but also future customer requirements.  You might also need to prioritise them.  Customers have their own priorities.  What is the relative importance of their needs and expectations - from their point of view, not ours?

Does your business understand what it needs to aim for in order to meet customer and market requirements?

It is top management who have the responsibility for ensuring that customer requirements are determined properly in these areas and are met with the aim of having satisfied customers who are loyal.  Loyal customers will come back and spend more.  Management have the responsibility to ensure that appropriate communication processes are established within the business so that people in the business know how to determine what customers want, how that information is fed to the people who are going to supply the customers and how they react to service they receive.

It is top management who should set in place the systems so that we know whether the business is providing effective and efficient customer service.  Irrespective of who actually deals face-to-face with the customer, it is the responsibility of top management to make sure that the business's staff understand what the customers are saying, and that the business is capable of meeting their expectations.

Management sets the framework by determining what the customer expects of the business.  This could involve:

1. talking to customers;
2. carrying out market or customer surveys;
3. accessing industry reports; and
4. identifying niche marketing opportunities.

AdamG

You know a good business, a bricks and mortar one that is, when you walk into it.  It's something I've puzzled over for years.  You just "know". 

The conclusion I've come to is that is it a combination of a number of things, pretty well all visual, although sometimes aural as well.   Part of it is the appearance of the business.  is it tidy, well presented, do the owners or managers have an obvious pride in the business.  Or is it untidy, with mess all over the place, scraps of paper or workings, not particularly clean?

And the people tell you a story as well, both in their own presentation, and just as importantly, are they happy and cheerful.  This is where the aural comes in.  Do they sound happy, can you tell if they like working there?  I remember going into an optometrist some years ago that had just a wonderful feeling of warmth about it.  The staff really cared about that business and what they did for their customers.

Where this is leading me is to my activity for today.  This is one of these days when you put something back in.  I won't pretend I don't get something back, well,  I may but usually takes a fair while.

Let me explain.  Telstra, Australia's main telecom, for a number of years, has sponsored the Telstra Small Business Awards.  The Awards recognise excellence in small businesses, across a number of categories.  They are not just a matter of putting in a 'feel good' story.  Applicants have to respond to a range of criteria, with the judges evaluating how effectively they have met each criteria. 

This is backed by site inspections.  The inspections have two roles.  Obviously they allow the judges to verify that what was submitted is real.  But they can also add to the submission.  Not every one can write well, or put together a great submission, but they may still have an excellent business.

This is my fifth year as a Regional Judge for the Awards.  I look forward to it each year because I see some great businesses.  And although I'm in the business of helping small businesses plug their profit leaks and improve their businesses,  I learn something new every year.  Something that I can take on board and apply to other businesses, or to my own.

Today I'm off to do the site inspections for the 2006 Awards.  From past experience I can tell you a couple of things already.  The winner will not be someone who makes a great song and dance about their business, and usually themselves.  It will be someone who just goes quietly about their business, looking after their customers.  Their customers and creating a business to serve them well, are their focus, not themselves.  Secondly, they will have good systems to run their business, systems which give them useful, timely information on which they can make decisions.  They always do.

 AdamG