Peel Back The Onion
– or –
Understanding What Can Be A Problem (And Taking Action)
Increase Your Chance Of Success
Being a smart entrepreneur with a great product, service or concept isn’t a guarantee for success. Companies can fail for many reasons. Obvious examples are lack of sales – no cash coming in the doors – and insufficient capitalization – no cash to sustain the business.
I’ve found three areas that are sometimes overlooked (not “peeled back”) or not really understood by a business owner.
1. Quality of Sales. Many entrepreneurs have a sales background, and they do what they do best – sell – sometimes to anyone! The business owner must recognize the following:
Is a “customer” really a customer if they buy but don’t pay or are very slow to pay? I tell my clients that if your customer doesn’t pay, they are not a customer. Don’t waste time or money on those deadbeats.
Is there a concentration of sales or of customers that may be risky to you if they slow down activity or go away?
When it comes time to value your company – make sure you have good quality sales.
2. Measure Gross Profit – and understand it. Many small companies fail to distinguish between overhead costs and cost of sales.
Cost of Sales are those direct costs that are needed to make a sale: cost of product or raw materials, cost for labor, cost of delivery and the like.
Gross Profit is Sales minus Cost of Sales.
Overhead Costs are the expenses the company incurs whether sales are made or not: rent, utilities, and insurance, to name a few.
Business owners must know their actual Gross Profit – they must get timely and accurate Financial Statements to do this. Think of Gross Profit as the contribution to cover overhead expenses and produce net profits. Make sure the overhead costs are in line and controlled as well as factored in to the pricing of the products or services sold.
3. The Pareto Principle. This well known rule is named after the good old Italian economist Vilfredo Pareto. More than likely 80% of your problems will come from 20% of your customers. Look at your customer list. Maybe you can eliminate some of those bottom feeders or put them on auto-pilot? Some savvy business owners even “help” some of these problem children find a home with a competitor – let your competitor “enjoy” this “wonderful” customer relationship.
Understanding these concepts will help put more focus on the real drivers of your business and make your life as a business owner a bit easier.