Cutting costs or increasing profits?

A publication editor contacted me this week asking for my input into an article they are thinking of running about what small businesses can do to cut costs. This got me to thinking that business owners should not be focused on cost cutting but rather on increasing profit and improving cash flow.

In good times, and especially in tough times, business owners should always be concerned about costs. Costs need to be analyzed. Vendors need to be negotiated with. The best possible deals need to be made in purchasing energy, paper clips, and inventory.

But a cycle of cutting costs can rapidly pave the road to extinction.

Rather, owners need to concentrate on profitability and positive cash flow. Sure, cutting costs can contribute to both – but for how long? When times are tough, the owner needs to bolster sales and marketing activities – possibly even increasing expenditures of time and money in both areas. Then the fundamental issues need to be addressed, issues such as: improved productivity, customer service, customer satisfaction, and innovative services and products. For survival the owner needs to play to strengths – not weaknesses.

What is your business doing to improve profitability?

Will Limkemann
Siqua Group Limited
440-871-0976
www.siqualtd.com

Who are your best customers?

There is a maxim that 80% of sales come from 20% of customers. Most companies go out of their way to coddle the top few customers. But do you judge your best customers by sales or profitability?

Clients I work with are often amazed at the results when I ask them to do profitability studies on their top tier customers. Often price breaks and other concessions are made to encourage more sales and to keep competitors at bay. The shock then comes when reality sets in and a client discovers that little or no profit is generated by these customers.

Keep track not only of sales by customer, but also profitability by customer. You should look at direct cost of servicing a customer as well as the indirect costs of supporting, responding to, and calling on the customers. If a customer is not profitable, re-negotiate with it, or fire it. Before taking on a new job or a new customer, do an analysis to make sure it will generate the income you need.

Multiple Revenue Streams

Many small businesses are “one-horse towns” – they have a single product or service that generates revenue. This may have worked in the start-up phase, but is a dangerous strategy for a growing business, and could prove to be catastrophic in a down economy. Reliance on a just one stream of income can be as risky as to be dependent on a single customer. As needs, fads, and disposable income change, market for the service may dry up.

Most business owners can readily find sources of income that are complementary to existing products and services. Look at the skills, equipment, and disciplines of your organization. How might they be used in different ways? What are the trends in your industry? Brainstorm with your employees on ways to branch out. Ask customers what they need that you aren’t currently providing. Ask customers what related services they are buying from other vendors. The answers might surprise you.

But do enter a new revenue stream with caution and with a sound strategy. Put together a business plan. Just as in starting a new business, determine how much demand there is, consider how you will market the new product or service, and calculate costs and profitability potential.

Increasing Prices

Many small business are caught between increasing costs and fear of raising prices. The reality is that, as most costs simply can’t be absorbed by the business, the only real alternative is to find innovative ways of increasing prices.

A study of one profitable business revealed that if they were to decrease prices by 10%, the result would be a loss. If, however, they were to increase prices by 10%, their profit would rise by 100%.

An article by Anne Field in the current issue of Businessweek Smallbiz magazine suggests four ways of raising prices without scaring off business:

1. Pass along the cost of fuel and delivery costs. Everyone feels the fuel pinch and can empathize with others who have to cope with the same problem. (Of course, right now the cost of fuel is not the issue it was even three weeks ago).

2. Implement “selective inflation”, by not raising the price equally to everyone. You may want to maintain current pricing on bigger and better customers, while raising prices for marginal customers and new customers.

3. Communicate what your are doing – especially to your larger customers. If you need to raise prices due to increased fuel and delivery costs, send letters to your customers explaining the tactic before the increase goes into effect.

4. Be creative in your pricing. For example, if you charge by the hour, perhaps you could move to a flat fee, and encourage greater employee productivity. You could also do what many packaged food companies are now doing – reduce the size of the product while charging the same price. Look at opportunities to keep your business running at between 80% and 90% of capacity. The article points out that running less than 80% increases overhead, while running more than 90% decreases productivity.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com
will@limkemann.net

The Constant Entrepreneur: Advice for Running a Productive Business

Key Small Business Issues

A colleague, who is also a small business advisor, posed the following:

“Although we are all facing hard-times in this economy, I wanted to ask what you think are two or three key hurting points that small businesses are experiencing the most and how we can specifically target these issues striking a nerve with the owners. It seems that if they are really suffering more than usual, the need for help should be even greater.”

Here is my response:

What I tell small businesses owners when they ask if they should be worried by the economy – my answer is “no”. (If they are running Ford they should be worried!). They should look at the economy as a way of sharpening their business skills, evaluate the market, and make sure they are selling products that people want at a price they can afford. They may need to change their business model to do so, but small businesses are resilient if managed properly. So long as we have a country of 300 or so million people, there will be demands for every type of product or service imaginable. It is up to a business owner to smartly meet the demands his/her businss can fill.

 

What are the issues are most on the mind of small business owners? Oil and Fuel Related costs are at the top of the list. As business advisors we can help business owners by assisting them in improving efficiency and helping to pass the costs on to their customers. The approaches will vary depending upon the industry. For example, in landscaping we can: help to make routes more efficient, train drivers in fuel conservation, train customers to accept fuel surcharges, etc.

 

If the company is a plastics manufacturer, help may be needed in: negotiating volume purchase of raw materials, material waste management, pricing to reflect increases in material and fuel costs.  (Many small business owners do not know their profit margins or their fixed or variable costs – we can help there).

 

In summary, smart business owners are going to weather the current economic storm and even grow and prosper. It may mean that they need to look at things differently and change strategy, habits, and tactics.

 

 

Will Limkemann

Limkemann Business Advisors

440-871-0976

www.neobizadvisor.com

 

 

The Constant Entrepreneur: Advice for Running a Productive Business

Financial Data – You Can’t Run a Business Without It

Yesterday I met for a couple of hours with the owner of a small flower and gift shop. She has run the business for ten years, and has taken very little personal income from the shop. Early in the conversation I asked her how much the business grossed last year – she could not even give me a ball park number, nor could she produce any current financial statements. Her idea of financial control is to call the bank daily for the current checking account balance.

What I have found in my years of advising small business owners is that it is not uncommon for them to have absolutely no understanding of their financial condition. Is it any wonder, then, that there are so many business failures? With no understanding of sales, costs, and values, a business owner can not possibly manage for profitability. If the business is profitable, it is purely by accident.

At least this owner has a relationship with a CPA who files tax returns and balances her check book. This CPA, like many who work with small businesses, has missed the opportunity of being of true value to the owner. These CPAs fail to explain the financial information and fail to provide financial analyses that could help the business to be better managed.

This shop owner will probably keep prodding along for the next few years trying to pay down debt and keep the business running. But without a financial understanding and a financial plan, the business, by most standards, will never be a success. The business certainly will not have built any wealth for the owner.

Will Limkemann
Limkemann Business Advisors
440-871-0976
www.neobizadvisor.com
will@limkemann.net