You go out of!

It’s an old saying, and maybe even a little trite, but it is worth thinking about. 

First of all, not having business starts with not having sales.  Without sales, you don’t have business.  No customers, no business.  It’s like standing on a street with your cap held out, hoping someone will drop some money into it.   Business starts with a sale.

So that leads to ….. having a product or service that someone wants to buy.  And they will only want to buy your product or service if it solves a problem they have, or meets a need.  Standing on that street with your cap held out doesn’t solve many potential donators problems, or meet many needs, unless it is a need to be generous and give – the charitable nerve.

It is a good idea to do some research and test the market, before you fully commit to “business”.  As Mark Ford says in “Ready, Fire, Aim”, trial your offering, and keep improving it.  What you have may not meet the mark, so find out what is required before you fully commit.  It doesn’t matter what you think.  You should only be doing what your customers want as they are the ones who are paying you.

And there must be sufficient numbers of such people to sustain your business.  In others words, is the market big enough?   Sigh, more research.  It is certainly not enough to rely on “Streakers Defence”, i.e. it seemed like a good idea at the time.

But of course, there is yet more to the business you need to have, to avoid going out of it. 

It must be profitable business. Inevitably there are a number of strands to this, and they relate to the price you are able to charge, and your costs. 

Now the bloke standing on the street doesn’t have many costs to operate his “business”, he doesn’t have a minimum price either.  He’s not able to say “nothing less than $5”.  He’s a price taker, not a price maker.

There have been many words written about pricing, both from a marketing and from a financial point of view.  For some reason, those writing from one viewpoint rarely take into consideration the other’s view.  You certainly will go out of business if you don’t get it right.

To my mind there are two key issues when determining your price;

Positioning is the first.  The price you set determines your position in the market.  It can make you just a commodity, seemingly no different from the competition.  Or it can set you apart, suggesting that your offering is not just different, but better.  Mind you, it had better be both, or you will be quickly found out.

Gross profit margin is the second.  It must recover all the direct (i.e. variable) costs incurred by that offering, then through the volume you sell, cover all your overhead/administrative costs, and leave sufficient over as your profit.  In the end, it is not the volume of sales you make that is critical to the sustainability of your business, but the volume of Gross Profits those sales provide. 

Small business is just that – small.  You don’t have the reach of big business, the ability to generate a large volume of sales at low margins.  You must generate the profits you need from the volume of sales you are able to generate.

Now to your costs.  You need to know your true Cost of Sales; all the costs directly incurred by the offering you make.  Now you might buy it in to resell, you might manufacture the product, you might repair something, or it might be a straight service.  Whichever, there will be costs which you wouldn’t incur if you weren’t selling that offering.

And this is where I have a beef with our accounting friends; they prepare your books for statutory purposes, to determine the amount of tax you need to pay.  And naturally they set out your Chart of Accounts to make that as easy as possible – for them.

They don’t set out you Chart of Accounts to make it as easy as possible – for you.  You want management information, figures that will help you make informed decisions.  So often when working with clients I find variable/direct costs allocated to Overheads/Fixed Costs. 

So the business does not know their true Cost of Sales, or what is their real Gross Profit.  It doesn’t matter from a tax viewpoint, but it does from a management viewpoint.

Whether they be Direct Costs, or Fixed Costs, you certainly need to ensure that you that you don’t incur Unnecessary Costs.  If you do, you might have business, but still go out of it.

There’s Nothing Wrong with Asking for Help

When clients approach me for coaching, I find they are almost always a business with a problem, a problem that if not fixed, will see them go out of business.  They usually have “business”, although frequently not enough, but often it is the wrong business, less than profitable business.

Often they lack a management mindset, and lack control over their business.  Eight times out of ten that lack of control comes down to a lack of knowledge of what is happening in the business.

For more than 28 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand the information they need to have control over their business, how to manage and analyse it, and how to answer that critical question – WHY IS IT SO?

If you would like to discuss with me how you might do that, book a Strategy Consult here

© Copyright 2016 Adam Gordon, The Profits Leak Detective 

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