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.
When clients ask how to close more sales and free up cash in their business, I like to tell the story of Byron the guns and collectibles dealer. He lives for his business because it gives him the chance to make a living out of doing what he enjoys most: collecting.
He was struggling 12 months ago because he was out of cash and unable to buy new stock. This was a real problem because the strength of his business lay in constantly having new items to show off. New stock encouraged his customers to come back often; no new stock meant they would tend to check out his competitors first.
When I first walked into Byron’s shop, one of the most obvious items was a beautiful old gun, proudly (and securely) displayed in a glass cabinet. I couldn’t help but ask how much it was worth. He explained that it he had bought it for $5,000 dollars, but was looking to sell it for $7,000. Following a hunch that I had hit on his problem straight away, I asked Byron when he had bought the gun. He didn’t remember exactly, he said, but thought it was about five years ago.
I asked Byron how many other, similarly high value items he had in his store. We went for a walk and in the course of showing me around, he pointed out at least a dozen items which he had bought for over $5,000 over the last few years. In each case, he was quick to tell me how much he was intending to sell the item for, and the margin was always 30 to 40%. But the fact was he hadn’t sold these items so they were costing him money and, most importantly, causing him to miss the opportunity of buying new stock.
Byron had spent nearly $100,000 on expensive items over the years. The items were attractive and valuable, but they weren’t particularly rare, so they weren’t appreciating in value significantly. In effect, Byron had put $100,000 on the shelf of his office and left it there for all that time. In other words, while he wasn’t borrowing money from the bank, in effect he was borrowing it from himself. He had missed the opportunity to invest the money somewhere where it would give him a solid return, such as in a term deposit or in blue-chip shares. And he missed the opportunity of using that money to buy smaller, less expensive items that he knew would sell quickly. He needed to do something (and fast) if he wanted to close more sales.
Compounding all of this was the fact that the global financial crisis had caused demand to drop markedly which meant his customers just weren’t coming in or spending as much as they used to.
By making a few simple adjustments, responding to trends in the industry and addressing a need that his customers, Byron was able to turn his business around, close more sales and double his bottom line.
The first thing he did was to free up some cash by actively selling some of his more expensive and slow moving items. He used online auction sites and his own network to find buyers, while keeping his marketing costs low. In some cases he had to sell the items for a little less than he had intended, but the benefit (when he was able to close more sales) was cash in his pocket.
The next thing he did was set up some systems to keep better track of inventory. He started by recording everything and noting the age of all the items (i.e. the length of time he had held it in stock). We agreed that in future, any item that had not sold after 8 months would be reviewed. Byron would investigate the item’s market value and decide whether or not it was increasing in value sufficiently to be worth keeping. If not, he would act to move the item on.
After a few months, Byron was making much smarter purchasing decisions. He was still enjoying ‘collecting’ for his store, but his focus was different. His focus was less on attractive, expensive but not-so-rare items, and more on smaller items he knew he could sell quite quickly. To his pleasant surprise, he increased cash flow by $100,000 in 3 months and found that by using this strategy, he was able to do more shopping rather than less, because he had more cash available to spend.
Lastly, but perhaps most significantly, Byron introduced 2 new complementary strategies which literally transformed his business. To counteract the soft demand for firearms and the relatively fixed, low margins, Byron convinced his customers to purchase 18 months worth of ammunition upfront and he provided storage (if required) onsite. This allowed him to renegotiate terms and pricing with his suppliers, plus generate more cash flow in the short term. Since the margins on bullets was much higher than on the guns themselves, his overall profitability improved. In addition, Byron incorporated training and certification into his standard offering and opened up his target range to paying customers 3 nights a week. This allowed him to create new, highly lucrative income streams and increase the frequency with which his customers came into his business.
While Byron’s story on how to close more sales might seem unique and industry specific, there are many ways to take the overarching philosophy of what he did and utilize it to improve your operating cash position.
How can you identify and start selling silver bullets in your business? Begin by first examining the big picture…
Identify the items in your inventory that are essentially dead stock – i.e. haven’t sold in over 8 months. Determine what the total value of the stock is and devise a plan to convert it quickly into cash using a minimal amount of advertising.
Focus on the gross profit margin of all of your products and services. Are some of these more profitable than others? To improve your overall performance, concentrate on the former, and improve or eliminate the latter. What items or services could you add which would allow you to service a need, improve your relationship with your customers and grow your bottom line?
Negotiate better terms and/or prices with your supplier in order to increase the amount of gross profit you make on each sale. Consider which items you could sell in bulk upfront to your customers and use this new volume to improve your buying leverage or cut out the middle man.
Marketing should not be treated as a fixed and sacred cow in your business. Do not spend another dime on marketing until you ensure that you are maximizing the amount you retain on each sale to cover fixed costs. Also, only spend money chasing customers and sales if you can measure the financial return that you will get. Unless you are a multinational brand, money spent solely on branding is wasted.
Make it easy for your customers to find you and see what you have to offer on the internet. The database of potential shoppers that you have earned the right to speak to, is in fact your greatest asset. What can you do today to add value, enhance their experience and close more sales?
Finally, examine the fixed expenses in your business. Identify whether or not there is a cheaper, faster or superior alternative that doesn’t compromise quality or customer service. Is there a way to shift how and what you do so that fixed expenses can vary (i.e on a pay per use basis) with the level of production and/or sales? And remember, no one has ever grown their business by [exclusively] focusing on cost cutting – so use this tactic as your final step in a comprehensive plan to get your business firing and hitting targets. Your primary goal is to close more sales and increase the amount of gross profit (or contribution margin) that you make from each sale.