Even though we’re on the other side of the recession there are questions about the future direction(s) business will go. But the nature of business owners is to “do something”. So — rather than waiting and watching, now is a good time to look at opportunities for change. Regardless of what is happening around you – it is always a good idea to be examining and adjusting your operational strategies to remain current and profitable.
If you have a sense that your company has had inconsistent results from your product lines or types of service, then you may want to consider working out a plan to correct and strengthen your company’s position. The most effective strategy would include:
1. Conduct an operational analysis by type of product/service or type of customer and determine where profits or losses are derived. Don’t be surprised if you isolate an area that is totally draining your cash reserves. Be careful here; consider all the implication of actions to correct the problem. Is the service or product actually a draw to customers and once they are in your shop, they purchase goods from you that carry a healthy profit? If this is the case then your loss may be, in reality, an advertising cost rather than a loss. Analyze.
2. Spend your time, money and energy on those areas of your business that bring in the best return. Advertise and sell the products that make the profits you need. You do not need to “slash prices”. You must learn to go after your best customer, not just anyone who may happen by. Identify and sell to the customers that are truly the key to the future of your company.
3. Consider contracting out the business that shows borderline or no profits. A business that specializes in your unprofitable product or services may be happy to act as your subcontractor and you may both be able to see profits from the venture. You can increase cash flow simply by selling out inventory and equipment of an unprofitable line in order to concentrate on what you do well.
4. If you must terminate a phase of your business, do it over time and help your customers find alternative vendors. Good customer service requires advance notice. Don’t just take action abruptly. You may very well undermine your customer’s faith in the ability of your company to provide support for those lines you do keep.
5. Promote what your business does well. Your company has a story to tell. It includes who you are, how you came to be where you are now (a strong, profitable company) and what you do well. Consider your business story and make sure that your public image is consistent with these facts. Accentuate the positive. Tell your story in words and actions. Brand yourself.
Is the timing right for you to sell your business? Perhaps you’re a baby boomer who is eyeing retirement. Or maybe you’ve built a solid business and your employees want to take it over. There’s even a possibility of a private equity group looking to deploy their cash reserves to make purchases and looking for a business just like yours.
What would it involve to prepare your business for such a sale or transfer? Usually a two-to three-year plan is required to position a company for an optimal sale. Your company and your books may still be recovering from the recent difficult years. But as the economy improves your bottom line is probably looking brighter. Consider that a high point in earnings is an excellent time to look towards a sale.
To properly gauge the value of your business you must put yourself into the shoes of a potential buyer. This is no small trick! You are no doubt partial to your business and probably see it with rosier glasses than a buyer would. A better option is to find an objective adviser, business broker, or other professional to assist you with reasonable valuation.
And then move on to ask for help in identifying areas you can enhance in order to increase that value. Look into the issues of your changing customer mix and the marketing messages you are using to reach those folks. Are you reaching the right people with the right information? What about your workforce, are they skilled and ready to start fresh with another business owner? If not, what needs to be added to their knowledge and skill base to make them so?
Look also to your products and services and ask yourself if you are keeping up with the pace of change and innovation. Is it time to make some new starts or modernize? What about your internal systems, are they up to speed? Your information systems? Can a new buyer walk in and find everything? Can he or she assume control right away, or will there be a steep learning curve?
Getting your house in order prior to a sale will make you more attractive to buyers and improve the odds that you’ll get top dollar for all you’ve built. The time might just be right.
Even if you are an existing business – you should be forecasting – projecting your sales. You may use actual numbers if you have historical financial records. But what do you do if you have nothing to refer back to? You will need to determine how many potential customers are there, how many of these potential customers are likely to buy from you, decide the average sale per customer and then project this out for the year. Try this:
First, determine the total number of potential customers living in your territory. (Don’t forget – the more clearly you can define your customer – the more realistic your research!) If you sell to the general public, you need to find the information from the new US Census data for your market area. You can find this information on the web or at the library (http://www.census.gov).
If you sell to other businesses, there are many potential sources of information; one of the best is a trade association that represents your industry. You can also find this information through a web search or at the public library. Once you have determined the total number of potential customers living within your geographical area – you have the base to begin narrowing down your target market.
Second: determine the number that will likely buy from you. You need to be realistic. Consider your competition (both in number and quality), consider that some of the people will not buy from you or your competition, and consider people will find substitutes for your product. What percentage of the total available population will you be able to attract?
Third: determine your average customer sales per year. How many purchases will your average customer make in a year? How much will they spend on each purchase? Is this a repeat business or once and only once. Does the average customer buy the same product/service or will they need other complimentary services? Trade associations are good sources of information to help answer these questions.
Fourth: determine your annual sales volume. You have determined the number of customers and determined the average amount each customer will spend per year. Multiply these two numbers together to calculate your expected annual sales volume.
Finally: Evaluate the annual sales volume figure. Does the number you calculated make sense? If not, go back and work the numbers again. What assumptions have you made about your customers? How accurate or risky are these assumptions. You can guess, and this is not a bad place to start. But – then – you need to back up your assumptions with actual figures to gain the greatest degree of reality for your projections.
Pricing products or services correctly is a crucial function of a business owner. But how do you go about doing that consistently and fairly?
Pricing obviously plays a large role in whether a business is profitable. The difference between your selling price and the cost of a product is the “contribution margin.” The contribution margin pays for all other expenses and then after that, some profit. Even if sales are high, you may still find there is no money left at the end of the month. This lack of cash can be from expenses that are too high, but many times it is because you do not have an effective pricing strategy. The difference between sales and profit is found in your pricing policies.
Some small businesses use the manufacturer’s suggested retail price. It is an easy strategy to use but it may not be right for you. It may create an undesirable price image and it doesn’t consider the competition’s pricing strategies.
Another tactic is pricing based on the competition. This is where many small businesses get in trouble — trying to compete with the mass merchandiser. Many of these “giants” can sell at retail for less than you can buy at wholesale. So while you may generate a great deal of revenue, you may be losing money with every product you sell.
You can price below the competition but this also reduces the profit margin per sale. This strategy requires careful monitoring and the ability to react quickly.
You can price above the competition – when price is NOT the customer’s greatest concern. Many people find their time much more valuable than saving a few dollars. Target your business at these individuals, not the bargain hunters.
The key to success is to have a well-planned strategy, establish your policies, monitor costs and evaluate your effectiveness. The formula is simple: Sales less cost of goods less overhead expenses equals profit.
Marcia Bagnall is Director of the Chemeketa Small Business Development Center and instructor of Small Business Management Program. This column is produced by the center. Questions can be submitted to SBDC@chemeketa.edu. Visit the SBDC at 626 High Street NE. or call (503) 399-5088.