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Quick Assessment of your Survival Skills

Home > Money With Melanie > Business Development

09 / Mar / 2009

Have you got what it takes to survive in tough times?

Is dropping your prices your first course of action when sales begin to slow? Unless you can come up with several other options, you’re headed for trouble.

So what are the 7 ways to help Recession-Proof your Business?

Step 1
DON’T PANIC – If you start now, you’ve got a Head-start on your Competition

Why this is Crucial to your Survival
1. You Call the Shots (You Can Make a Difference)
Deciding to take action in response to a crisis puts you back in control of the situation.

2. You’ll Make Good Decisions (Clarity brings Creativity)
Panic won’t help you make the clear-headed decisions you want to make right now.

3. You’re the Leader (Don’t Panic the Herd)
Your staff will be looking to you for leadership – show them (through your words and actions) that you’ve got a plan (or are at least working on one) and they’ll become your greatest asset in surviving and thriving through tough times.

Step 2
WHAT ARE YOUR TRUE COSTS – Have you thought of everything?

How do you decide what to charge for your products or services?
Pricing is one of the most complex areas of running a business. It’s also where business owners typically spend the least amount of time. Many business owners fail to understand the true costs of producing and selling their products or the true cost of delivering their services.

Using these Simple Pricing Guidelines will Help avoid the Pitfalls.

  • Determine the cost of delivery of the product or service to customers excluding overheads.
  • Know your Overheads so that you can work out your ‘Break-even’ situation and how much you need to sell.
  • Decide how much profit you want and calculate this into the Price.
  • Know your Margin and report on it regularly to ensure it is not being eroded by increased costs.
  • Know your customer satisfaction levels. Dissatisfied customers won’t pay premium prices.
  • Regularly review prices. Make small increases to cover increased costs. It is much easier to make small regular price increases at intervals throughout the year than one large increase say just once a year.

Here’s a Simple Example which shows the ‘True Costs’ of running a business

  • How a Transport Company with 10 Trucks wastes $120,000 a year:
  • In addition to being on the road, the Drivers need to complete their paperwork in work hours.
  • The Business Owner charges out their Driver’s billable time. Let’s say $100 per Hour.
  • How much time does each staff member take to complete their paperwork? 15 minutes per Job
  • If the time spent completing paperwork has not been included as billable hours to a client – that’s $25 per Job not charged out.
  • With 10 trucks completing on average 2 Jobs per day – That’s $500 per day not being charged out 48 weeks = $120,000 per year!
  • The company could employ an Administration Assistant to complete all drivers paperwork for around $45,000 per year.
  • Making a $75,000 Saving!
  • The question to ask here is are you selling all the hours you are paying your staff for?
  • Write down everything you can think of that’s a cost to selling your product or service.

Step 3

PROFIT & REVENUE – Find Out Where You’re REALLY Making Money (It might not be where you think!)

Which one is driving your Business?
Considering Profit & Revenue in the context of a slowing economy (as opposed to the booming economy we’ve spent the last few years enjoying) it stands to reason that Profit needs to be the driving force in your business.

The important point to realise in relation to Profit, is that every dollar you save is a dollar straight onto the bottom line. Whereas every dollar of extra Revenue (sales) may only be a matter of cents onto the bottom line, as a sale carries with it direct costs and overheads.

We’re not suggesting you shouldn’t be working on Revenue Growth, but if you’re not making much in the way of profit right now, focusing on growing the Revenue side of your business, will only put further strain on your cashflow. With business borrowing currently being restricted – increasing your Profit first will allow for sustainable Revenue growth.

Finding the answers to these 2 questions will put you in the powerful position of knowing where to focus your energies for maximum impact.

  1. Which are your most profitable products/services
  2. Which are your most profitable customers?

Increase Profit – How to Collect the Information YOU Need
This is much easier than you think!
There’s 3 Questions you’ll need to ask, your Profit & Loss Statement is where to find the Answers.

  1. What is our Revenue this past year?
  2. What is our Cost of Goods Sold/Direct Costs?
  3. What are our Overheads?

Making savings in your Cost of Goods Sold/Direct Costs and Overheads will directly lead to an increase in profits. No hasty or rash decisions required here – just go line-by-line through your Profit & Loss Statement and find where savings can be made.

  • Work out your cost of goods sold % (COGS/Revenue) x 100
  • Work out your overheads % (Overheads/Revenue) x 100

Increase Profits – How to Identify Savings
Cost of Goods Sold/Direct Costs – How to get Cost of Goods Sold/Direct Costs under Control

  1. Look at what you are Buying – i.e. products and services and spend some time investigating and negotiating better deals and more efficient ways of delivering.
  2. Don’t underestimate your value as a Customer- never be afraid to shop around for other suppliers. If you are a good customer they will be bending over backwards to supply you at the right price.

Overheads
This is an area where you can make massive savings. Do a review of all overheads and ask yourself these questions:
Why am I spending this and what ‘value’ does it deliver onto the bottom line? Should I cut it out?
How could I do this differently to achieve a similar result?
Who else could deliver this product or service and how much would they charge?

Action Item – Purchase Orders
Introduce a purchase order system into your business i.e. no money gets spent unless you, the business owner, approves it.

Step 4

NARROW YOUR FOCUS – Survival in a Tough Market means Going Back to Basics

Step 4 – Narrow Your Focus – It’s Time to Take Action
The 80/20 Rule – 20% of your customers, products or services will provide 80% of your business.

You’ve looked at what you’re selling and to whom. You’ve determined which products, services and customers are making money and which aren’t. If you want to maximise profit, you’ll need to grow the profitable lines and customers.

Concentrate on the customers who are your most profitable and products and services that provide 80% of your profits.

You may need to sack some customers or discontinue some product lines or services in order to focus on the ones that are really making you money. This is not the time to have cashflow tied up with slow moving product lines or services that are expensive to deliver or customers who are slow to pay.

Get Back to Basics
If you’ve grown your business in a direction that’s no longer viable, correct your path now to focus on your strength. This will fortify your business to weather the storm that may lie ahead.

Step 5

CASHFLOW – The Secret to Keeping the Life Blood of Your Business Flowing

There are 3 Things you can do Today to improve your cashflow.

Your precious cashflow is more than likely being held up in one of three places.

  1. Your Debtors/Customers – are your customers dragging out their payment terms? Your debt collection strategy may need a review to get your cashflow moving again.
  2. Your Suppliers – have a strategy in place to ensure you take advantage of every day of credit available without straying from your terms. This will allow you to keep the money in your bank account for longer. Negotiate better terms with suppliers or talk to an expert about your options.
  3. Your Stock on Hand or Work in Progress – look for efficiencies in your company’s ordering system and job completion procedures. Example – invoice jobs on completion not at month end, or introduce progress payments. Consider installing a Job Management or Stock Management System to ensure purchasing and work in progress have set parameters that can be easily interpreted and managed.

Understand where your current cashflow has gone astray.

  1. Calculating Average Days Receivable.
    This is the average number of days it takes your customers to pay you. Compare this to your stated terms of trade.
    Example: Accounts Receivable 510,000
    Revenue $3,200,000
    Time Period 365 days
    510,000 / 3,200,000 x 365 = 58
  2. Calculating Average Days Payable
    This is the average number of days it takes you to pay your suppliers. Are you paying too soon, and not taking advantage of every day of credit in your trading terms?
    Example: Accounts Payable $150,000
    Direct Costs $1,900,000
    Time Period 365 days
    150,000 / 1,900,000 x 365 = 28
  3. Calculating Average Inventory Days
    This is the average number of days stock sits on the shelf or materials & labour are tied up on WIP. Think of stock as $100 notes stacked up on the floor.
    Example: Stock on Hand/WIP $360,000
    Direct Costs $1,900,000
    Time Period 365 days
    360,000 / 1,900,000 x 365 = 69

Taking steps to reduce your Average Days Receivables and Average Inventory Days or Work in Progress Days can have a huge impact on your Cashflow.

Here’s how to use these calculations to show the number of days on average your money is not in your bank account.

Is it now clear exactly where your cash is?
If you know where your cash is there’s No Need to Panic, you just need to improve your methods for getting it back into your bank account. If you’ve not got enough information in your accounting system to complete the previous Cashflow Calculations then there’s also No Need to Panic. Be aware of the time lag between you paying for goods and your customers paying you. This will show you where your efforts need to be focused for survival, and then it’s onto sustainable growth once you’ve got your profitability sorted out.

Budgets, Cashflow Forecasts & Profit Projections – Knowing your Cashflow position with regular monthly projections & reporting will be important for all aspects of your business Survival & Growth. Any business wanting to borrow money from a bank, will have to prepare Budgets & Cashflow Projections, to show how they can pay it back. ay it back.

Step 6

BORROWING – How to Make your Bank Manager Smile

Borrowing to Grow (Is it Necessary?)
If you’re considering Borrowing from the Bank while our economy is slowing – you’re in reality going to need to prove your ability to pay the money back. You’ll need Budgets, Recent Financials and Forecasts.

Looking at your ability to unlock cash from within your business may be a much simpler and ultimately more profitable exercise.
Firstly, you’ll know EXACTLY where you stand financially – an incredibly empowering position to be in.
Secondly, you’ll know any decision you make is based on the facts rather than wishful thinking – it’s not a good time to be taking big risks or going off on tangents with your business. Focus on your profit.

Finally, it’s important to realise in relation to cost savings, that every dollar saved is a dollar straight onto the bottom line. Whereas every dollar of extra sales (revenue) may only contribute a matter of cents onto the Bottom Line, once direct costs and overheads are attributed.

If you’re borrowing just to sell more without working on your profitability you may be headed for trouble! You’ve still got to pay it back in a slowing economy.

Step 7

GET BACK TO DOING WHAT YOU LOVE – You’re Good to Grow!
Having taken the time to work through the numbers, you can now feel much more confident, that it’s not all doom and gloom for your business.

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