Profitology

Category: Business Profits

  • How I learnt more about running a business from selling one than I did in 10 years of operation

    How I learnt more about running a business from selling one than I did in 10 years of operation

    They say hindsight is a wonderful thing, and the same can be said about learning (and applying) business principles. I gained a lot of insights about successful business practices after I sold my business than I did from 10 years of operations. Many of the lessons came from reflection after the sale, and others were learnt during the process of transitioning to the new owner.

    The transition process gave me the unusual opportunity of observing the results of business decisions and activities. Although I was still employed in the business, the business was no longer under my control and I benefited from seeing the results of decisions that were made by someone else. (Admittedly, I often struggled with this aspect – it is extremely difficult letting go of something you have built up over a 10-year period.)

    I became aware of how certain actions I had taken when I owned the business had hindered on its overall success. It was the sale of the business which finally hammered home the importance of valuing your product and service. This was an aspect I had always grappled with and the greatest lesson I take away.

    If I am truly honest, I admit the things I learned about running a successful business I already was aware of. The sale process simply exposed the areas which needed improvement and magnified those aspects where I was excelling.

    So, what did I learn and/or reaffirm when I sold my business?

    1.      Relationships are key. Although I have always known that a strong business is founded on good relationships with clients, it wasn’t until after I sold my firm that I truly understood how valuable maintaining a solid relationship is.

    2.      Focus on the Client. Put yourself in your clients’ shoes, how would you like to be treated, how can you wow them, would you be happy with the result you are providing?

    3.      Busy does not Equal Success. If the profit results don’t reflect the level of “busy” you are experiencing there is something wrong with your business. This is a result of your price point being too low, your costs being too excessive, there are inefficiencies within the business, or a combination of all 3.

    4.      Value Yourself. In addition to the point above, you need to be confident with the value you are offering to your clients and customers. If you do not charge an appropriate price to reflect your value you will ultimately go out of business.

    5.      Let Go of Control. If you want to build your business, and continue to prosper, you need to be prepared to delegate to staff, trust them to do their job, and accept that at times they will make mistakes. You can’t micromanage all of the tasks and grow a successful business.

    6.      Your Team is your Greatest Asset. Treat your team as you would like to be treated and their appreciation and loyalty will be evidenced by their commitment to, and performance in, your business.

    7.      Not Everyone is Your Customer. You will not be able to run a successful business by trying to please all people. Find the aspect in which you will excel, your point of difference, or market niche. You only need enough customers who share your vision and are looking for your offerings to fill the capacity you have available within your business. Sing to those customers and you will have an enjoyable, successful business.

    8.      There is nothing wrong with Being Small. Being a small business gives you the advantage to make changes quickly, adopt new processes and technologies giving you an edge over your competition.

    What I learnt most about being in business is that no one has all the answers. Even the most successful business owners make mistakes and have areas in which they can improve. You will benefit immensely from learning from your peers, sharing stories and observing each other’s strengths and shortcomings.

  • 30 harsh realities about being in business

    30 harsh realities about being in business

    Whether you have been in business for a number of years, or are relatively new to business, you have probably come to appreciate the realities of business.

    When you first started out in business you likely had dreams of changing the world, enjoying flexibility and freedom and yet you may have found yourself soon accepting that being in business is not a walk in the park.

    Below is my list of 30 harsh realities of being in business. I encourage you to pause and consider if any of these resonate with you, and if so, ask yourself which changes you will implement, or actions you will take to acknowledge those points.

     

    1. The buck stops with you.
    2. There is always a better way to do something.
    3. Businesses should run on systems and people should run the systems.
    4. Having a consistent profitable pricing system is fundamental to your growth and survival.
    5. Great technology will not correct bad process.
    6. Selling is an exchange of value. If you don’t sell, you can’t add value.
    7. If you discount your prices, or give something away for free, you are telling your customers that you do not value your product or service. How do you expect them to?
    8. If you compete on price you will eventually lose to the bigger companies with deeper pockets.
    9. Your customers do not care about you. Your customers only care about what you can do for them.
    10. Being small doesn’t mean you can’t provide more value than someone who is big. Being small small means you can adapt swiftly and easily to the changing and individualised needs of your customers.
    11. Being new doesn’t mean you can’t provide more value than someone who’s been around a long time. Being new means you can offer a different approach relevant to your customer demands.
    12. You are far better employing someone with a good culture fit and training them, than employing an expert who doesn’t suit your culture.
    13. You only ever have one of two problems, a systems problem or a people problem.
    14. Your staff will be more motivated by their personal goals than by your business goals 15. Just because you’ve always done something that way, is not a good enough reason to keep doing it the same way.
    15. The experience of a poor quality product or service will be remembered long after the delight of a cheap price is forgotten.
    16. If the experience you provide is poor, you will lose to someone’s whose isn’t.
    17. If you’re not using video as a communication channel to prospects and clients, you need to start.
    18. The only 2 questions to ask yourself are: “Will this help me to serve my clients to a higher level and have a greater impact on their business?” And “Will this help us to grow our revenue and our profits?” Everything else is a distraction.
    19. Taking decisive action is the only force that moves a business forward.
    20. Mistakes are opportunities to learn and improve.
    21. Every problem has a solution.
    22. You have limited time and resources to run your business. Make sure you utilise them appropriately. As a guide, 80% of time in the business and 20% of time growing and improving the business.
    23. Persistence and perseverance are key virtues to hold. Nobody created a successful business by quitting.
    24. There is no one true definition of success. Success is in the eye of the beholder and depends upon your own individual goals and aspirations.
    25. Recreating the wheel wastes time, energy and money. Learn from those around you who have already forged the path.
    26. Knowledge isn’t power. Action is.
    27. You can’t continue to do the same thing over and over and expect different results in your business. If something is not working, change it.
    28. Turnover is not a measure of business success. Profit is.
    29. Social Media Likes and Followers is not a measure of business success. Profit is.
    30. Profit is not an event at the end of the year. Profit is something you work consistently towards with each business decision and action.

     

    Have I missed any, or are there some you don’t agree with?

    Share your thoughts below.

     

  • Profit is not an accident

    Profit is not an accident

    All too often, when presenting business owners with their end of year financial reports, I would be asked the question “Where is the profit?” The common consensus appears to be that profits should be cash in the bank.

    The accounting principles, however, dictate that profit is applied on the balance sheet in the form of debt payments, asset purchases, amounts owing from customers and stock holdings.

    I beg the question: if the business doesn’t have the cash does the profit really exist?

    Is there a guarantee the stock holdings will be converted to sales and hence cash? Will the customers pay their accounts? Does paying down debt benefit the business or the business owners in the short term?

    It appears to be commonly accepted that Business Owners have little or no control over their profits and far too many treat it like a surprise at tax time when they learn how much profit they generated for the year. A bit like an excited kid hoping Santa will grant them their wish at Christmas.

    Profit is not an accident.

    A business owner can control the profitability of their business, if they take responsibility for understanding how their business makes a profit, and which actions they need to take to produce a profit.

    These actions involve acknowledging the basic principle of profit; profit equals income minus expenses. It goes without saying that in order to make a profit your income must be greater than your expenses.

    However, it is not uncommon for business owners to incur expenses with the expectation, or rather, hope, that they will generate enough income in the future to cover those expenses. They spend now on the basis they will land a dream contract or a windfall of large sales in the future.

    In reality, there is no guarantee of future income, and a business owner can do little to control it. On the flipside, a business owner has the ability to control and minimise the expenses of the business.

    A business must operate, or live, within its means to be profitable. If income drops, so too must expenses.

    This may mean having to make drastic cuts and look for alternative methods to generate the income for the business.

    When was the last time you sat down and took a good look at your expenditure, with the view of cutting it back?

    It may not be possible to reduce expenses significantly overnight, however a simple review of your profit and loss, or better still, the transactions within your bank statement will identify those costs which you may not require.

    Up for a challenge?

    Once you have culled the “low hanging fruit” of the expenditure items, its time to start thinking more creatively about ways you can significantly cut costs and improve the bottom line.

    The logical step is to look for alternate suppliers or ask existing suppliers for lower rates.

    Even better, would be to consider removing the expense altogether. The process of stepping back and considering how essential the expenditure is may trigger innovative ways to achieve the same results.

    Bringing in an external party will help you achieve this more effectively, as they are not as close to the business and can look at avenues from a different perspective. I recommend you consult with your accountant, business adviser, or trusted colleague to assist with this process.

    Take a chance. You may be surprised at what you come up with.

  • Embrace the Naive Expert

    Embrace the Naive Expert

    n my role as Business Advisor, I meet with an average of 15 business owners a week, and of those 15, typically 3 are business owners I haven’t met previously.

    I am truly in my element in this environment. I thrive on meeting new people, learning about their business ideas, gaining insights into industry “quirks” and experiencing the motivation and drive entrepreneurs have for making a difference in their community.

    When faced with industries or business concepts I am not familiar with I have, on occasion, found myself apologising for not being well versed in the particulars of the industry.

    Until recently that is. I was fortunate to sit in the audience of a presentation by Duncan Wardle, Former Head of Innovation and Creativity for The Walt Disney Company. Duncan introduced the concept of including a Naive Expert when holding brainstorming sessions, and making important business decisions.

    He spoke of the benefits of having an unrelated person in the room to ask the “silly questions” and encourage the group to think differently.

    Armed with this insight, my perspective of having limited industry knowledge has changed. I now embrace my naivety of industry quirks, and use it to my clients advantage when working with them to provide insights in to their business operations and strategy.

    It provides me with the avenue to ask the basic questions, to challenge the status quo, to remove the blinkers, and to present out of the box ideas. All the while applying my knowledge of business principles to achieve sustainability and longevity.

    This approach empowers the business owners to consider their options from other angles and to come up with a business model which sets them apart from their competition.

    So when planning your next brainstorming session, or if you’re feeling stuck in your business, reach out to an unrelated party, who DOESN’T know your industry or business. They may be your most valuable contributor.

  • Why the smaller pie results in larger profits

    Why the smaller pie results in larger profits

    Would you rather have a slither of the large pie, or the entire small pie?

    Are you likely to hit more targets if you rapidly fire a machine gun randomly, or take precise shots with a sniper gun aimed at a target?

    There is a misconception that you will be more successful in business if you service everyone and anyone. The thought process exists that the larger you cast your net, the greater the chance of catching enough fish to meet your needs.

    In reality, it has been shown that the reverse is actually the case. Where you target your product or services to a small segment of your market you are more likely to attract the volume of customers you need to generate a profitable business. When you are fishing for a certain type of fish, you get to know the attributes of that fish, where it swims, what depth of water it prefers, what it eats. As a result, you place your net in those waters where you know those fish swim. You choose the time of day most appropriate for catching the most possible fish, and you use a certain type of bait which is attractive to that type of fish.

    You become an expert in fishing for this type of fish, hence there is far greater success from deliberately fishing to catch the fish you want, with far less effort expended.

    Creating a niche market generally leads to a sense of simplicity within your business which can be achieved by limiting the products or services you sell, targeting a particular customer segment, and/or creating automation and streamlining processes.

    The benefits of achieving simplicity is that it gives you the opportunity to replicate or scale the model, thus enabling you to penetrate other markets or locations.

    An example of a business which has developed a niche business model is The Posy Post.

    The Posy Post is a florist who creates one bouquet, or posy, a day, at the same cost every day. The price includes delivery of the Posy. Order are placed by 11.30am for delivery that day.

    What I like about this business model is the simplicity. Customers are not presented with numerous choices, causing confusion and barriers to the purchase. The price point is the same every day, and there is value for money in the quality of the posy.

    I believe this model appeals to people who are time poor, who want to give a gift of flowers without spending a great deal of time choosing which arrangement. It also appeals to an audience who do not have a great deal of knowledge of flowers.

    How do I choose a specific target?

    1.     Consider which aspects of your work or business you enjoy doing the most. For example, it may be a particular aspect of the service you deliver, or you may gain great satisfaction from working with certain clients.

    2.     Where do you add the most value in your business?

    3.     Which aspect of your business is the most profitable?

    If you have been casting your net too wide, now is the time to hone in on which markets will represent a better catch for your business. Consult with a business advisor, accountant or a colleague to step back from the business and analyse it with a Bird’s Eye Approach.

  • Profit from the Psychology of Pricing

    Profit from the Psychology of Pricing

    It is often said “You get what you pay for” with the perception of quality of product being linked to the price you pay. More often than not, this turns out to be true, cementing the belief that the amount you are willing to pay does reflect the quality of the product or service you receive.

    When setting prices, business owners are often misguided in to setting a price based on what they think their customers are prepared to pay. Generally, this is lower than necessary to deliver sufficient profits resulting in the business owner working long hours with very little, or no reward.

    Adopting a pricing strategy which positions your brand as delivering quality and value-based products presents the product or service as an attractive option, often gaining more customers and sales.

    This is evidenced in the case study from Robert Cialdini’s “Influence”, which discusses how a local jeweller managed to sell out of turquoise jewellery because it was accidentally priced at double its initial price, instead of half (which is the price she had intended).

    The inflated price now made the jewellery irresistible to buyers, who had before ignored the colour over all others (which was the initial reason for the intended price cut).

    Now that the price had been raised, the context of turquoise jewellery had a “high value” in the buyer’s minds, even without an explanation!

    How do you increase your prices without scaring your customers off in droves?

    If you are innovating a new product or service, customers do not have a price point to reference to and are more likely to accept any price you nominate.

    However, if you are competing with others in the marketplace and choose a high price point you need to give them a reason to choose your product over others by standing out from the crowd.

    Apple is an example of a company which has established its brand as a high quality, yet highly priced product with people lined-up to purchase its product.

    Apple has created this image through the use of its high-quality packaging so that the experience of opening the item out of the box is a thrill to the customer. Further, the product launches create scarcity by limiting the number of sales per day.

    How do you amplify your product or service to gain market appeal?

    Quite simply, to position your product or service at the top end of the market is to make it look fabulous.

    You do this by:

    1.      Creating a story about your brand which attracts interest as well as fulfilling a need

    2.      Understanding the desired outcome of your target market, and ensuring the product not only delivers, but is how it delivers is communicated

    3.      Articulating the benefits of the product or service to the customer

    4.      Providing testimonials and case studies from existing customers

    A final point for consideration, buyers are irrational and tend to believe that the most expensive option is the best. Let’s face it, if there is nothing setting off their alarms, why wouldn’t they?

  • Find the Hidden Profits in Your Business

    Find the Hidden Profits in Your Business

    As business owners, we all are looking for simple ways to increase the profits within our business.

    The common approach is to invest time and money in to marketing to attract new customers and make more sales.

    However, what is often overlooked, is how to generate additional sales revenue from existing customers.

    Afterall, an existing customer made a decision to purchase from you once, and if they were happy with the product and service it is likely they’ll buy from you again, or even better, recommend you to a friend.

    How can you increase sales with existing customers?

     

    1. Consider which other products or services you offer that you can suggest to your existing customers

     

    A cleaning business I worked with were looking for ways to increase their revenues. We identified that many clients on regular cleans would likely be interested in one-off window or carpet cleans. Each existing client was contacted to offer this service, resulting in additional revenue being generated for the business, without a vast outlay in marketing campaigns.

     

    1. Reward your customers for doing business with you. After an initial sale, contact your customers with a discount voucher, or gift if they buy from you again within a certain time frame. Encourage them to refer a friend, by providing a free gift or reward when they do.

    When introducing new products or services, it may be worthwhile offering it to your existing clientele first. This shows that you value their patronage, and also enables you the opportunity to seek feedback to make changes to the product or service (if possible) before targeting a broader market.

     

    1. We are all familiar with the notion of adding on products which complement a purchase. However, something as simple as selling a larger quantity of a product will generate higher revenues and increase profits.

     

    For example, a coffee shop selling a large coffee by default rather than asking the customer which size they would like could increase revenues by as much as 10% per sale.

     

    Looking for other ways to tap in to hidden profits?

     

    Consider these options:

    1. Review your expenses line by line on the profit and loss and identify which items you are incurring unnecessarily. You may be paying for a regular subscription which you are not using.
    2. Compare suppliers to ensure you are getting the best value for money. It is amazing how quickly mobile phone plans are upgraded. You may be paying an excessive amount for a small amount of service.
    3. Increase your prices. A minor increase of 5 or 10% will unlikely go unnoticed, yet be added straight to the bottom line.

    If you’re stuck for ideas as to how to tap in to that hidden profit potential, reach out to your brainstrust – your employees, accountant or business advisor will be sure to help you identify those untapped profits.

  • Scaling Up: Three Measures You Should Know to Grow Your Business Effectively

    Scaling Up: Three Measures You Should Know to Grow Your Business Effectively

    Is your company planning to scale up? Are you prepared to tackle increased workload? Is the business ready to handle more demands from existing and new customers?

    There comes a point in time when most entrepreneurs choose to grow their business. Sometimes, it is because the business is not big or efficient enough to meet growing demands. Sometimes, it is simply because most business owners are big dreamers – they look forward to a greater future for their company.

    With this clear vision of success, smart business owners put measures in place very early on. This makes it easy for them to scale the business efficiently without losing focus on the company’s core activities. By planning for growth at an early stage, business owners and their team are able to adopt processes and practices they needed to manage increased demands and operations.

    “Scaling effectively means anticipating demand, not reacting to it” – Jason Albanese

    That means the best time to think about scaling up your business is before you even need to do it. The earlier you get into this scalability mindset, the better you will understand and apply the essentials to growing your business exponentially. Follow these action steps to prepare your startup or small business for the realities, challenges and constraints of scaling up:

    1. Implement systems and processes from day one.

    Have you documented the way you do everything in your company?

    If not, start recording all essential procedures in your business. Make sure that all tasks performed are properly done and documented. Take screenshots of company procedures or record tutorial videos of crucial business processes that are followed by all on a daily, weekly or monthly basis. This ensures that all team members are clear about the company’s standard systems and processes. Should roles evolve or should a team member take a vacation leave or resign, someone else in the organisation can step up to the role and complete the tasks for them.

    2. Adopt a comprehensive Customer Relationship Management (CRM) System to record client and prospect data.

    A business that thrives is one that focuses on the needs of its customers.

    That’s why having an effective system in place helps you identify, understand and serve your ideal customers. Have one system to record all your customers’ contact information. This is massively helpful in tracking leads and conversions; facilitating sales and marketing functions; and developing a client profile of needs, traits, and special requirements. Eliminate the guesswork and back up your plans with solid customer data.

    3. Automate processes.

    Automated bookkeeping and invoicing is incalculably useful for business owners who want to speed up their cash flow.

    These days, it’s possible to receive on the spot payments from clients through your laptops, tablets, and smartphones with credit card, PayPal and other online payment systems accessible 24/7. Workflow management and time tracking can also be automated. Communication between employees is more efficient these days with instant messaging and team management systems such as Skype, Slack or Fleep.

    Which of these steps have you taken to prepare for scaling up your business fast and profitably?

  • 10 Highly Effective Ways to Cut Your Business Expenses

    10 Highly Effective Ways to Cut Your Business Expenses

    Want to generate more profits? Of course, increasing turnover and enhancing product margins are all common methods of improving the company’s bottom line. Have you considered these options to reduce your overheads?

    Every dollar you can save in overhead costs goes straight to the bottom line.

    Whereas, only a portion of a sales increase turns into profit, because of the cost of generating the sale in the first place (i.e., your gross margin).

    Consider, for example, where you have a gross margin of 20%. Increasing sales by $5,000, will result in an increase of profits by $1,000 ($5,000 x 20%)

    Yet, reducing your overhead expenditure by $1,000 will have the same effect on your bottom line. An increase in net profit of $1,000. So what actions can you take to reduce your overhead expenses?

    Here are the top 10 things you can do to save on your overhead expenses.

    1. Negotiate cheaper rates for your merchant and other banking facilities.

    If you have been with your current bank for many years, it may be worthwhile asking them if they can give you a cheaper rate. Chances are, their current rates may have decreased, which you could take advantage of. Another way to get a lower rate is by asking if they could offer you a discount for your loyalty.

    2. Pens and marketing gimmicks – do you really need them?

    How many times have you received a branded pen and gone to do business with the company? What are you trying to achieve by purchasing the pens or other marketing material? Handing out branded pens and notepads is not only passé but also ineffective at best. Consider alternatives. Brilliant marketing strategies begin by knowing what your target customers really want.

    3. Overtime and penalty rates for staff – are you managing the staffing costs well?

    Are you always paying your staff penalty rates for overtime? If so, consider employing an additional staff to cover those overtime hours. Alternatively, review the staff roster to analyse where employees spend most of their time. Search for patterns and find ways to maximise employee productivity.

    4. Insurances – do you have a broker, and are they seeking the best rate for you?

    Insurance is the perfect example of an expense where you can shop around to find the best offer. Be sure to compare apples with apples, and only settle for what adequately covers your needs. I highly recommend using an insurance broker to review your circumstances. She or he should able to tell what’s most suitable for your business.

    5. Is your advertising dollar working for you? Are you measuring your results?

    Too often, I see business owners splashing money on advertising with no plan or measurement. Before agreeing to the next newspaper or radio ad, think about the return on investments. Also consider the volume of sales you need to generate to cover any advertising expense. Measure the contribution a given advertising program has on revenue and profits to find out if it’s even worth the investment.

    6. Shop around for better deals, or consider asking existing suppliers for a discount.

    When was the last time you evaluated your current service provider? How do they measure up against similar suppliers in the market? Although your preferred vendor offered you the best deal years ago, there might be cheaper and better options available now. Competition and innovation often drive down the prices of goods and services. Consider switching to another supplier that offers the best value for your money. But if you are happy with your existing supplier and wouldn’t want to switch, ask for a loyalty discount. Simply asking whether you are getting the best rate can lead to considerable savings over time.

    7. Look for technology options that could save you time by creating efficiency.

    We are very lucky to live in an era of great technological advances. And as these innovations are constantly evolving, they help reinvent our working process. Technological advancements can be adopted to streamline processes and free up employee’s time. Nowadays, many businesses get more done in the same amount of time.

    What technology options can you use to improve business processes? Consider how you can systemise operations and maximise your business productivity using technology.

    8. Save on printing costs.

    As noted above, technological advancements cut down the cost of printing.  There’s no need to print every single document in the office. For example, programs such as pdf writer allows you to complete forms directly on the computer. Meanwhile, an app called Docusign enables you to digitally sign documents, again without the need to print any document. All these and more could help your business save on printing-related expenses. Plus, there’s no need for massive storage space to file physical documents.

    9. Review your subscriptions and other direct debits coming out of your bank account.

    Do you manage recurring bills through direct debits? The benefit of direct debits from your bank account is that you can set and forget. This means you never have to worry about paying that monthly bill, thus ensuring your service remains constant.

    The downside of using direct debits? It’s the same: you can set and forget, thus paying for an ongoing service which you are no longer using.

    Check your bank statement for the last month and see whether you’re still using each of those regular subscriptions or direct debits. Set a regular schedule for an account review to ensure that you are only paying for services that you need.

    10. Check your invoices.

    We are all human. No matter how careful your suppliers may be, they can still make mistakes. So check your invoices to ensure that you are not being overcharged for a product or service.

    You make a couple of small savings by asking for a discount from your supplier or reducing your printing costs.  At first glance, these don’t seem like much. Yet remember that small amounts add up quickly, and can have a significant impact on the bottom line.

    By reviewing your profit and loss statement on a line by line basis and carefully considering how you can make savings in each area of your business, you will go a long way to improving your profitability. At the very least, you will rest easy, knowing that you have fine-tuned your business overheads.

  • The 6 Pillars of a Profitable Business

    The 6 Pillars of a Profitable Business

    Running a successful business is like building a home, it takes a lot of hard work and essential materials.

    It certainly helps to adhere to the fundamentals of good business management. To say that these foundations can help you reach your most ambitious business goals is no exaggeration.

    So here are the most important pillars you need to run a highly successful business. Give these ideas a shot and see what happens.

    Purpose

    Put simply, your business purpose is what makes your business tick. It is what your business is designed to do. Ask yourself, What need am I fulfilling? What problem am I solving?

    By defining and fine-tuning your business purpose, you are laying the foundation for a clear-sighted company and building a consistent brand in the process.

    Some questions to ask yourself are:

    1. Why am I in this business?

    Your business purpose drives all the decisions you make for your company. Having defined that purpose clearly, you can make better decisions about how to market your business, who your target market is, and how to select team members to train in programs, systems, and procedures.

    2. What is my purpose?

    Purpose speaks to what you, as the leader and/or founder, aspire to contribute and how you want to affect the world around you. It’s something about which you care deeply (See Ken Blanchard and Jesse Lyn Stoner). Purpose tells people why you’re doing what you do.

    Product (or Service)

    How does your product or service provide a solution for your target market? Do you consistently deliver a high-quality product or service? This is a balancing act every seasoned entrepreneur knows too well.

    Customers may like a great product yet be disappointed by bad customer service, e.g. late delivery, inattentive or rude customer service representatives, etc. If you have to choose between the two, the customer service associated with delivering the product or service outweighs the product itself. People will always remember how you made them feel.

    Try to look for the sweet spot: provide an excellent product to attract new customers and offer exceptional customer service for repeat business.

    Processes

    What are you doing to achieve your business goals? How do you know if your systems and strategies are working? Do you document your company’s basic processes and are these core procedures followed by all?

    Proven processes define how you do business. Having a system in place ensures consistency in your product or service. Every organization needs to have consistent core processes to achieve its goals and scale up.

    Once you have established and documented the main processes, your next step is to ensure everyone follows them – consistently. There are hidden twofold benefits:

    1. when key employees leave the organization, someone else can step up and assume the responsibilities; and
    2. when new employees join the company, you can use this as a resource for business process training.

    People

    People are your greatest asset and potentially your biggest downfall. How do you hire people? How do you choose when to fire employees? Have you noticed that most successful businesses have good people?

    Your employees are the face of your business. As the business grows, you as the owner will have fewer dealings  or interactions with customers. You must be able to trust that your staff can treat your customers the way you would. How can you find people who share your vision, mission, and values?

    The right people are easy to identify yet hard to find. They are positive, competent, and accountable. As a business owner, your role is to choose, assign responsibilities, review, reward, and recognize employees for their unique contributions. That’s how you keep a motivated and happy team, which is key to a thriving business.

    Price

    Your pricing positions your product or service in the marketplace. Better pricing can definitely boost sales. Are you aiming for a high volume of turnover or high-quality product and service?

    The price you place on your product or service reflects the choice you make. How does your pricing strategy fare so far? Are you selling profitably?

    Getting the pricing strategy right is one of the keys to a profitable business. You need to ensure your pricing provides an adequate margin to cover the fixed running costs of your business and generate a profit.

    Promotion

    Promotion refers to raising customer awareness of a product or brand, generating sales, and creating brand loyalty.

    Promotions are carried out using traditional media such as newspapers, magazines, and television. Recently, the use of social media has seen businesses capture their audience’s attention and create a buzz around their product or service at a much lower cost. Businesses are able to engage with their audience through the use of Facebook, Twitter, LinkedIn and other social media channels.

    Promotions can also be carried out in physical venues such as markets, sporting events, shopping centres and trade shows.

    The bonus 7th Pillar: Passion

    Passion allows you to persevere after setbacks. It’s the drive needed to pick yourself up on the rough days. It’s the fuel that helps you lead and inspire your team, convince customers, motivate you to implement systems and procedures, and continually learn innovative ways to do business in your industry and stay a step ahead of your competitors. How strong is your passion for business success?

    Purpose, product, processes, people, pricing, promotion, and passion are the seven pillars of a great business. Which one of these does your company have? Strengthen your business with these pillars as a foundation and you’d be surprised to see it grow by leaps and bounds.

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  • Where did my profit go?

    Where did my profit go?

    “How did I make that much profit? I don’t have that much money in the bank.”

    It’s not uncommon for business owners to ask this question. But there’s a logical explanation behind it and the answer can be found in the balance sheet. It’s called ‘a statement of financial position’ for a reason.

    By looking at this key financial report, you can get a snapshot of:

    • what your company owns (assets) and owes (liabilities/debts);
    • how much you have invested in it; and,
    • why your business profit doesn’t match what’s on your bank account.

    What are the common uses of business profits?

    For starters, let’s take note of some common ways business owners use their profits (ie. the remaining revenue after expenses):

    1. Make loan repayment
    2. Invest in new assets
    3. Buy inventory
    4. Pay dividends

    Further, where you have invoiced a customer and they are yet to pay you, the debtor amount (accounts payable) also contributes to your profit allocation.

    Since business profits can manifest in many forms including the money in your bank account, the profit amount you see on the balance sheet is not the same amount you have in the bank.

    Here’s a sample illustration

    For example, a fictitious small business named XYZ Pty Ltd, made a profit of $25,000 for the year.

    Although the profit is not sitting in the bank, the money has been used in the ongoing operations of the business.

    This is illustrated in the balance sheet below:

    balance sheet

    The table above shows how to compute for the profit allocation. Get the difference between the balance sheet items of the current year (20YY) figures and the prior year (20XX) figures and you will derive the total amount of profit, which is $25,000. But how much of this amount is considered cash at the bank? Only $5,000.

    So where did the rest (i.e. $20,000) of the profit go? Check the stock on hand ($2,000), unpaid debts of traders ($3,000), and repayment of bank loan ($15,000). Add them up and you’ll get the total profit of $25,000.

    That’s why you don’t see all that money in your bank account. So, yes, it’s possible to have a huge amount of profit on your financial report yet have less money in your account.

    Profit increases assets, decreases liabilities

    As you can see on the balance sheet, you use profits to buy new assets or pay off loans or debts.

    A Profit and Loss statement or income statement is another financial report that you can use specifically for profit analysis. This report contains the summary of the operating activities, revenue, expenses, and income during the course of the year.

    Although the balance sheet and profit and loss statement may present different information, they are interrelated. Understanding both financial reports can empower business owners to make adjustments and better decisions to ensure success.

    Do you have more questions about balancing the books? It’s always smart to seek professional help when you’re confused.

    Have your books checked for accuracy and gain clarity by asking your accountant to explain how you can use the financial statements to your advantage.

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  • An Important Metric Every Business Owner Needs to Track

    An Important Metric Every Business Owner Needs to Track

    One of the most common metrics many small business owners measure is turnover. They gauge the success  of their business based on the growth in turnover from year to year.

    When a peer asks how business is going, we boast that turnover has increased by X percent, or the dollar value of the turnover being reported. However, measuring revenue as an indicator of business performance is, at best, pointless.

    It fails to take into account the gross margin made on the sale. For instance, if a product or service is priced at $100 and the cost of producing it is $90, the gross margin on the sale is $10 or 10%.

    What does this mean? For every product sold, there is $10 available to pay for overhead or fixed costs such as rent, wages, and insurance. If the cost of producing the sale increases, the amount of funds available to pay for the fixed costs decreases, and hence the business net profit suffers.

    There’s another drawback to focusing solely on revenue as a metric. For instance, if the volume of sales increases, and the gross margin remains constant, the additional labour costs required to manage the increase in sales volume may lead to lower business profits.

    Increase Net Profit By Focusing on One Valuable (Yet Often Neglected) Metric

    Gross margin is a valuable indicator of a company’s survival and profitability. It is the difference between the selling price of a product or service and the cost of producing it. Instead of focusing on increasing turnover, concentrate on strategies to increase the gross margin for a more profitable outcome.

    You can start by implementing efficiencies or negotiating cheaper prices from suppliers. If you can bring down the cost of selling a product or service, you will be able to raise the gross margin.

    For example, reducing the cost of a product by $5 increases the gross margin by $5 or 15%.  This gives the business owner much better returns for his efforts than trying to increase the revenue by 50%.

    Let’s do the numbers, based on the example above:

    Sales of 5,000 items at $100 per item

    Total revenue:            $500,000

    Cost of sale per item: $90

    Total cost of sale:       $450,000

    Total fixed costs:        $45,000

    Net profit:                   $5,000

    Increase in turnover:  40%

    Sales:                           7,000

    Total revenue:             $700,000

    Cost of sale:                $630,000

    Gross Margin:             $70,000

    Total fixed costs:         $45,000

    Net profit:                    $25,000

    *This assumes there’s no extra labour costs required to generate the increase in volume of sales.

    Decrease in cost of sale:    $5

    Sales:                                   5,000

    Total revenue:                   $500,000

    Cost of sale per item:        $85

    Total cost of sales:            $425,000

    Gross Margin:                   $75,000

    Total fixed costs:               $45,000

    Net profit:                          $30,000

    This example demonstrates how focusing on increasing gross margins rather than sales volume can be a far more effective method of improving the viability of the business. A decreasing gross margin can hurt your cashflow. Adequate gross margin assures that you will still have enough money to cover the rest of your business expenses.

    Monitor your gross margin and devise strategies to increase it. While sales and profit matter, improving gross margin is equally (or even more) important to keep your business alive and thriving. It’s a metric you cannot neglect.

    So next time a peer asks about your turnover, try to steer the conversation to a much more realistic metric: gross margin.