Posts Tagged ‘customer’

Being Profitable and Strong Increases Valuation

Wednesday, November 9th, 2011

In my last post I talked about 4 things every owner of a successful business must think about. They are the 6 reasons a company is sold, the 2 factors which apply to each of those situations and what being “profitable” and “strong” mean.

I promised then that I’d talk about how to make a company profitable and strong. So here we go.

1. How do you achieve consistent profitability? Here are 6 things every business owner can do to increase the odds that her/his company will produce consistent, industry beating profits:
a. Develop a strong product line – not only having width and depth in current products but also always having new products under development.
b. Build a great reputation – and recognizable identity or brand – in your target market(s) by delivering quality products and services, on time, that meet your customers’ needs.
c. Be in more than one market (which ideally do well in different phases of the economic cycle).
d. Have a broad customer base built on strong companies or affluent consumers.
e. Generate a stream of recurring revenue rather than working solely on projects which have to be replaced when complete.
f. Innovate – and create some intellectual property, products or processes, which can be protected, creating a sustainable advantage or a barrier to lock out competitors.

2. How do you make a company strong? Here are 6 things an owner can do to survive the loss of key people and keep his/her company’s balance sheet ratios looking good:
a. Document all processes. Especially the sales process which can be mapped, then managed, using a CRM system.
b. Involve all of the key people in a formal, annual business planning (and budgeting) process, which is completed 2 months before the start of a fiscal year and which includes formal, quarterly reviews.
c. Maintain strong internal financial controls, including cash flow forecasting, and insist on timely, monthly reporting.
d. If the management team doesn’t know and understand the drivers of the key balance sheet ratios have your accountant run a training program for them.
e. Always put leases and contracts – for everything and everyone – in writing.
f. Make Human Resources management a key part of your strategy and culture by e.g. driving accountability and responsibility through job descriptions; making decision making independent of the owner; identifying talent and training people for growth.

A company which is profitable and strong can survive the prolonged absence of the current owner as a result of injury or illness because it will continue to: 
• Execute its proven strategy.
• Be innovative, building barriers against competitors.
• Operate day-to-day without missing a beat.
• Produce revenues and profits at, or above, previous levels.
• Keep and attract good people.
• Attract financing should it be required.
• Survive any unexpected crises in the industry or economy.

The ability to do that also makes this type of company very attractive to a potential buyer – because the risk of the company failing in the short term is reduced significantly. And that means the valuation of the company – which determines the selling price – will be at the high end of the scale.

So by doing the 12 things I mentioned (and, in all fairness, some others like them) a business owner wins in 3 ways.

She or he makes great money while they run the company. They build security for themselves and their families in the event they are injured, fall ill or even die. And they maximize the return on the long hours, missed vacations and risks they’ve taken by getting a great price for the company if it’s sold.

How good is that?

If you enjoyed this you will also enjoy The 2 Truths Every Business Owner Has To Face and The Future Of Your Business: Succession or Exit

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6 Tips for Protecting Your Long Term Success

Sunday, June 13th, 2010

Some of things I’ve written about in the past were confirmed recently by a man with an outstanding track record for building successful companies! I’ve followed the writings of Norm Brodsky http://blog.inc.com/ask-norm/norm-brodsky/ for a number of years. He’s built 7 companies and is blunt, to the point and often outspoken. In his March column in Inc. magazine www.inc.com Norm says……

Don’t let fear lead you into making decisions that will damage your business in the long-term. When you’re looking at implementing cost-saving or even survival strategies, remember that this economic downturn, like all downturns, will come to an end. Norm uses the example of a retailer of luxuries whose monthly revenues have dropped by 50%, but his logic applies to any business. So what does he say?

Point #1 – Don’t reduce your exposure to your customers. A lady he’s advising (Lisa) wanted to reduce the time that all of her stores were open by 2 hours a day. Norm’s point – she’s cutting her selling time by 25% to save an amount that doesn’t compare to the margin dollars she could make in that time. Our thought – across the board cuts to marketing expenses in B2B markets, without first weighing their impact, could just as easily produce negative, long term results.

Point #2 – Think about your people. Lisa had built her staff carefully over a number of years by hiring and training good people who reflected her values. Norm’s point – by cutting their hours she was cutting their pay – and risking losing them – instead of reassuring them their jobs were secure. Our thought – think about the knowledge of your business and the investment you’ve made in training that walk out of the door when you lose good employees.

Point #3 – Be creative when cutting expenses. Being in retail, rent was a big component of her monthly expenses. Because Lisa had 4 stores and had signed personally for her leases, her landlords were unlikely to renegotiate with her. Norm’s point – be creative in the face of apparent barriers. He suggested she ask for a short term reduction in rent which would then be added to the end of the lease. Our thought – brainstorm creative solutions and write down every idea that comes up, no matter how crazy it seems. This process will unfreeze your mind and help you find things that can be made to work.

Point #4 – Avoid the temptation to cut prices. Lisa suggested holding a sale. Norm’s point – instead do everything possible to hold the line on prices and add extra value instead, for example hold a customer appreciation event. Our thought – adding value takes so much more energy than cutting prices but once you cut prices how do you justify putting them up again? Bundle an extra add-on or service with existing products and services for a limited period of time.

Point #5 – Find untapped markets or other opportunities. While Lisa had 4 stores, they were all on the West coast. She had a dislike for both paying commissions and giving up control of her sales efforts. Norm’s point – she had great gross margins with which to pay commissions on what would be brand new revenues and she had to let go to grow her business. Our thought – Type A personalities (i.e. most entrepreneurs) hate giving up control and many (particularly the males, my wife assures me) have great difficulties moving outside of their comfort zone. But if you keep doing the same things then don’t be surprised if you get the same (or worse) results. The economy and our markets have changed dramatically – we have to do the same.

Point #6 – Using/increasing debt. With very strong margins Lisa had managed to stay debt free but now she was thinking of applying for a loan. Norm’s point – you can’t borrow your way out of debt so get a Line of Credit instead and use it only as an absolute last resort. Our thought – by maintaining your prices and margins and using creative ways of reducing costs you can keep on generating profit. By focusing on collections (perhaps by offering incentives for quick payment), keeping tight control over inventories and working with your suppliers you can keep the cash flowing.

Norm closes his article by echoing a couple of themes I’ve seen in a number of places recently. The first one is that, no matter how things look today, the downturn will come to an end. Our thought – it’s sometimes hard to remember when you’re shovelling the snow off your driveway in the middle of a January snowstorm that, in 4 or 5 months the golf courses will be open. But summer always comes. The second theme is that some companies will come out of the recession stronger than others. If you want yours to be one of them then you have to take advantage of your most important resources – imagination and creativity.

Prices – 6 Reasons To Keep Them Up

Monday, November 23rd, 2009

Some of the questions which I get when I finish a seminar, workshop or webinar inevitably involve price strategy. It’s a topic close to my heart (I am a Scotsman after all) and one that provokes strong emotion amongst most business owners. And that’s interesting really, because most buyers typically rank price around 4th in their list of buying criteria.

Price is important only when the product or service being sold is a commodity and very few products actually are true commodities (can you think of one right now)? Large consumer goods companies spend millions on advertising to convince us that some products which are commodities, really aren’t. (Does it really make a difference if you buy gas from PetroCanada or Shell?)

But it probably isn’t necessary for the average business owner to cut prices, offer discounts or to spend a lot of money on advertising to get customers to pay a price which enables them to make an acceptable profit. In fact here are 6 reasons why you shouldn’t be discounting or cutting prices.

Reason # 1. There is no business that doesn’t have the potential to command an acceptable price for its products or services if it is able to market those products or services in such a way that the customer perceives added value. If you don’t believe me just think about the difference in price between a Lexus and a Hyundai – they’re both just a means of transportation. Tip Top tailors and Harry Rosen both sell men’s clothes – but don’t wait for Harry to have a $199 sale before buying your next suit!

Reason # 2. As business owners it’s our job to create the perception that our products and services offer superior value and to back that up with superb service. How do we do that? One way to begin is to figure out who your best customers are (they buy regularly and never complain about price) and ask them why they buy from you rather than from someone else. But don’t ask them to rate the reasons you think they buy from you, ask them to tell you what they consider is important and then ask them to rate your performance on those. Then you can figure out what makes you unique in their eyes.

Reason # 3. Two easy ways to add value are to really understand what’s going on in your customers’ business and how your products impact their success; then pass this information on to your staff and train them to provide what your customer will see as great customer service. (Of course maintaining the quality of your products, and doing regular customer satisfaction surveys won’t hurt either.)

Reason # 4. Remember if your gross margin is 30% and you reduce price by 10%, sales volumes must increase by 50% to maintain your initial profit level. For some reason we’ve come to believe that offering price discounts is a good long term strategy. If you still believe that consider the problems that the North American car manufacturers have created for themselves with, for example, “Employee Pricing” campaigns. Or think about how hard it was for the Bay to get away from “Bay Days” or Sears to stop their “Scratch and Win” promotions. You’re right, despite saying they were going to stop them they’re both still doing them. Once you’ve dropped your prices it is very difficult to get them back up to previous levels.

Reason # 5. Price discounting works in only two situations – where you have a definite cost advantage over your competitors and/or your product or service is one where customers are genuinely, truly, price-sensitive. We’ve already dealt with the price sensitive case and if you have a cost advantage why would you pass the entire extra margin on to consumers rather than investing some of it maintaining your technological or other advantage? Let’s face it, you aren’t in business to simply match the price your competitors set, you are here to serve your customers well and make a profit.

Reason # 6. Remember, if your gross margin is 30% and you increase your prices by 10%, you can sustain a 25% reduction in sales volumes before your profit is reduced to the previous level. Research shows that roughly only 15% of customers think in terms of price. They are better left to your competitors because they will never be satisfied and will always be looking for a better ‘deal.’ Their loyalty is impossible to achieve and they’ll never recommend you to anyone else. Focusing resources on servicing this ‘low’ end of the market won’t sustain the future growth of your business through either your turnover or profitability. It’s far better to work with those people who are happy to pay for value.

If you don’t believe my math or that customer surveys don’t have don’t have to be expensive or if you just want to know the date and location of my next seminar drop me an email

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