If you’re in business, one of the most important questions that you must be asking yourself is “what is the best way to grow your business?” How can you take what you have, expand on it but keep your costs as low as possible?
Fortunately, history has given us plenty of good examples of how NOT to do this. Perhaps the best of these happened in 2001 – when thousands of companies went under in the dot com bubble.
But how did so many go so far wrong?
In those days, start-ups (with little or no income) and existing companies (with dreams of expanding their business online) were renting the biggest and best offices. They were signing huge print advertising contracts, paying ridiculous sums for banner ads and taking enormous salaries.
When sales were lower than expected and the cash to keep paying all those expenses dried up, these businesses had no way of easily adjusting their monthly expenditures because they were primarily FIXED, not variable. Their only option was to declare themselves bankrupt and close down.
Compare this situation with Amazon.com which started in a suburban garage with old doors on sawhorses for desks. By keeping fixed costs down, they were able to stay in business long enough to start generating a profit. They are now a huge company (with real offices) making huge profits.
So how does all of this apply to your company?
No matter how big your current business is, the aim is to grow your business while keeping your fixed costs as low as possible as a percentage of sales. And there are many practical ways to do this.
Begin by creating a simple excel spreadsheet of your current revenue and expenses each month. Ensure that you have correctly separated the fixed and variable costs of doing business. Roughly speaking, the breakdown should look something like this:
– Cost of Sales (includes cost of goods and wages for subcontractors)
= Gross Profit
– Fixed costs (includes rent, wages, marketing, telephone and utilities etc.)
= Net Profit
Based on your current financial results, set your monthly revenue targets for the next 12 months and estimate the cost of goods sold. For example, if you currently generate $20,000/month in sales with a 60% gross profit margin, you might like to grow your business by 25%? Therefore, you would use a projected sales target of $25,000 each month with Cost of goods sold at around $10,000 as a starting point. This would leave you with a gross profit each month of $15,000. If your sales fluctuate each month due to seasonal variations, manually adjust your forecast to reflect these ups and downs so that you will have a more realistic picture of your financial performance.
Now here is where most business owners will go wrong…
Most business owners will make the mistake of assuming that fixed costs are fixed – the owner will just blindly start to place the existing amounts for rent, marketing, wages, telephone etc. into the financial projections. Fixed costs are referred to as fixed because they are fixed at a point in time. This does not mean however, that they are fixed forever and cannot be altered. In fact, when you are preparing a business plan and financial projections to grow your business, you should consider almost every aspect of your business as “up for debate and re-adjustment”.
That is one reason why you need a decent business plans – you can use it to re-evaluate and plan for the future so that you can improve and grow your business. Without a concrete plan, in all likelihood, you will continue to get the exact same results that you got last year.
Where you will get the most value in this exercise is by going back over each cost (fixed or variable) to identify opportunities to improve your gross and net profit margins. Cutting costs may be possible and advisable in some areas of your business. However, cutting costs [in isolation] is not usually an effective strategy to grow a business. In order to grow and improve your bottom line, you will need to ask yourself the question – “how can I grow my business without expanding costs”?
Here are some effective ways to do just that:
1. Think of ways to partner with others to expand your reach and sales without actually having to open another location or hire more full time employees. You may already have underutilized capacity to increase your sales right now.
2. Introduce products or services that complement the ones that you currently have and contribute more to the bottom line of your business.
3. Re-negotiate the terms or prices you have with your suppliers to increase your gross profit margin.
4. Selling online is a very cost effective way to increase your reach without increasing fixed costs.
5. If you manufacture goods, you could identify ways to increase production simply by tidying up, rearranging the layout of machines and planning more cleverly (to reduce work in progress and downtime). Often mistakes and rework can be costly to your business and surprisingly, they can be prevented by taking time during the business planning process to brainstorm solutions. Making better use of time is another fantastic way to increase production with minimal impact on fixed costs.
Surprisingly, 95% of business owners never take the time to create a business plan and forecast of revenues and expenses. Of the 5% that do, only a small portion refer back and measure their progress against their key performance targets. That is the number one reason why so many businesses either don’t make much profit, or worse, go under, each year.
A business plan doesn’t have to be 50 pages in length and take 200 hours to complete. It just has to be realistic and useful. To do this properly, follow my basic outline for projected revenues and expenses above. It should only take 48 hours of your time. 48 hours, in exchange for more sales, more profit and peace of mind, is a small price to pay.
04 Aug 2011
If you are like most business owners, you went into business because you are passionate about AND good at WHAT you do… and you wanted the autonomy and financial freedom of owning your own business. You were probably thinking, “as long as I am good at what I do, how hard can it be to make a decent living and support my family?” And you have probably discovered that it is actually harder than you thought.
Here’s the problem…
You may be one of the 97% of small business owners who discover that although you work incredibly hard and your sales seem to be increasing each month, you have little to show for it financially. Perhaps you are already doing well but you are unsure how to accelerate your results or expand your business? Or you may simply be wondering why you are struggling to pay the bills lately even though your accountant says that you are making a good “profit”.
One of the biggest problems is that business owners often convince themselves that being busy is what business is all about. And you tell yourself “as long as I work hard and do my best, there is not much else that I can do”. Everyone knows that we’re supposed to work smarter, not harder, but the challenge lies in knowing HOW to do that. And in the meantime, you may have found it just seems easier to do everything…just in case it’s important, or makes a difference.
So, if you’re supposed to do less, HOW do you figure out what is critical or what will have the biggest impact?
In a typical 8-9 hour day, what percentage of your time and effort has a positive and tangible impact on your bottom line? Do you strategically plan what you will focus your time on or do you just try to cover everything on your to-do list plus whatever emergencies pop up? The bottom line is this, if you cannot read and understand your financials, it is difficult for you to say for sure WHY your business is not as successful as you would like it to be. You may think it is due to the fact that you don’t have enough customers or sales but you could be missing the point completely. In fact, most of the businesses don’t need more customers, they need more cash flow. And cash flow issues can often be fixed without spending a dime on marketing.
And here’s the best part… all of the answers you need are sitting right there in YOUR financial statements. You just need to learn how to unlock the insights and use them to your advantage.
Every day that you put off learning how to unlock the insights in your financials means that you are wasting at least 2-3 hours a day on tasks that are not improving your bottom line. In fact, it could be the sole reason you are not as successful as you would like to be.
This bad habit you have developed -of working way too hard and assuming that success is somehow linked to the amount (not the quality) of work, will take time to break.
Unfortunately, there are no quick fixes when it comes to breaking or establishing new habits. In the 1960’s a highly regarded plastic surgeon, Dr. Maxwell Maltz discovered that it took 21 days for amputees to cease feeling phantom sensations in their amputated limb. From further observations and significant research he established that it takes 21 days to create a new habit. This part of the brain, the limbic system, is a slow learner.
Brain circuits take engrams (“memory traces”) and produce neuro-connections and neuro-pathways only if they are bombarded with new information for 21 days in a row. This means that our brain does not accept new data or information for a change of habit unless it is repeated each day (without fail) for at least 21 days. Changing habits (whether positive or negative) can be done, but it takes time and consistent effort.
Do yourself a favour and identify just one or two steps that you can take each day that will enable you understand what your financial statements are trying to tell you. Make a plan on paper – specific decisions and actions that you can take to move forward in this aspect every single day for the next month. Read a book, speak to your accountant, watch a webinar or spend some time reviewing your statements and comparing the results to last year.
And remember to track your progress each day and find an objective person outside of your business to hold you accountable to your plan, actions and desired results.
Article Source: http://EzineArticles.com/6047921