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STOP CHASING THE WIND Don't wait for more customers, maximise your business profits today! By Scott Richards ~~~ Smashwords Edition Copyright © 2013 by Scott Richards. All rights reserved. Smashwords Edition, License Notes This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each recipient. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author. Disclaimer All information herein is educational and not advice. It is general information and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment. The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you've invested. While useful for detecting patterns the past is not a guide to future performance. Some figures are forecasts and may not be a reliable indicator of future results. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. NO REPRESENTATION IS BEING MADE THAT ANY STRATEGY WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES. All rights reserved. This Document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, in part or in whole, without explicit written permission of Knowledge to the authors except where permitted by law. Table of Contents Foreword Great Business, Poor Financial Controls Consider discounting What does financial management look like for the typical small business? Step 1: Develop a clear mission; build brand value through focus The elements of your mission: You don’t have a business; you have a brand Building brand equity Delivering on expectations, keeping promises Step 2: What are your Critical Numbers? Measuring the Only Really Important Thing – Your Return on Effort The lifetime value calculation A SWOT analysis Step 3: Systemise & Strategise The turnkey solution How do you build a business that works without you? What is Strategic Thinking? Step 4: Find Your Unique Competitive Advantage Looking at an online business: Find your unique competitive advantage Communicating your Competitive Advantage Scenario Step 5: Implement and Reflect What is working? What needs improvement? About Beyond the Numbers Small Business Financial Strategists Foreword Sunday morning is your favourite time of the week. Every Sunday you go down to your local coffee shop for breakfast and to read the paper. However, just as you are heading out the door the phone rings. You answer it. “Hi, I have just called to inform you that if you come down to Generous Joe’s shop within the next 30 minutes you could win $100. To win $100 all you have to do is roll the dice and roll a six. Are you interested?” What is response? Are you willing to give up breakfast to drive 30 minutes for the possibility of winning $100? My guess is that a few people would make the trip but most would continue with their breakfast plans. However, before you get out the door the phone rings again. “Come quick! One of your staff members says he is going to hand out $20 notes to the next five customers who come into the shop!” What is your response now? You go straight to Generous Joe’s shop to try and win the $100. Of course you don’t. You would go straight to your shop to save your money. You may think this scenario is a little absurd. However, this happens all the time in small business. A business will spend all their time chasing sales, while money is being given away from other areas of the business. They are on what I call the small business carousel: forever moving forward but never actually getting anywhere with many ups and downs. A business will have an excellent product or service but they don’t have the right strategies to hold onto the cash as it comes into the business. Many times the business owner does not even know why they are losing money and will continue to chase more sales to make more money. Please don’t misunderstand me. I am not against trying to increase sales. Marketing is extremely important and should be in everything you do in business. However, marketing with poor financial control is futile. It is like chasing the wind. This e-book is for those business owners who need to regain financial control of their business. They want to stop handing money out and start maximising their profit at the level they are at now. When the business has financial control increasing sales won’t like be chasing the wind but will be profitable and rewarding. This e-book outlines the process I used to help a business put strategies in place to maximise their profit. These strategies increased their profit by 560% from $32,000 to $211,000 in just twelve months. Unfortunately, there was no one silver bullet but a process of continual improvement. I continue to use a similar process when working with small businesses. If you would like to learn more about how I can help your business maximise its profit then please visit www.beyondthenumbers.com.au. All the best, Scott Great Business, Poor Financial Controls There’s a great challenge facing business owners today: It can always be found cheaper online. That’s the new rule for the new internet age of business. And while you offer something of value, your prospects are willing to pay shipping and handling if they can shave 20 or 30 percent off the price you charge. Just ask Harvey Norman or Dick Smith Electronics or Borders. Business models are hard to change – and the tendency is to cut prices and cut costs to meet the ‘new rule’. Which raises another challenge: how do you avoid going under water by taking these actions? A real problem when many business owners today don’t really know how their business is travelling day- to-day. US author Michael Gerber of E-Myth fame talks about the “Entrepreneurial Seizure”, where you as a business owner fall victim to the “most disastrous assumption anyone can make” about going into business. It is an assumption made by all people who have some skills and who go into business for themselves to leverage those skills. That “Fatal Assumption” (Gerber’s words) is: “if you understand the technical work of a business, you understand a business that does that technical work. And the reason it's fatal is that it just isn't true.” In fact, it's the root cause of most small business failures. Most people are not all that literate in financial management. Know the difference between cash and profit? Direct and fixed costs? How to manage your accountant? Surprisingly, many business owners say no to these questions. Without financial management, you are driving a car without a dashboard. In today’s highly competitive climate where the internet is forcing the hand of business to be price competitive, SMBs can be blind-sided by financial statements and reports. They get the statements from their accountant and focus only on what they need to pay the tax office. Few will actually do any financial analysis. Most people don’t particularly like or understand financial management. They leave it to others. That’s a problem. In recent times customers are taking longer to pay, thus constraining cash flow. The sale is not made until the money is in the bank. Getting the SMB to do any real financial analysis such as a debtor analysis, forecasting cash flow, and accounts receivable is crucial. We can make it easier by graphical interpretation, using for example accounting software packages. Setting prices in a competitive framework requires analysis. Matching prices to competitors may be necessary but discounting can be dangerous to the financial health of a SMB. Some business owners discount without fully appreciating the impact on profits. You need to have a significant increase in volume. Consider discounting Many business owners see this as a weapon to bat off competitors and to attract customers. Few, however, appreciate the impact of discounting on their bottom line. For the average business a 10 percent discount would require something like a 30 percent increase in volume to maintain profit levels. Pricing is very much a strategic financial issue. You have a business to run and it needs to make a profit. Exactly how much profit you want to make, and by when, should show up in your overall strategic objectives. The message: start looking at and beyond the numbers. With accounting software and the requirement for at least quarterly BAS/GST returns you will more than likely have a system that can produce timely and accurate financial statements. If you already produce proper reports why not use them to make more money. The traditional key reports are the balance sheet, which gives a picture of how well your investment in the business is performing; your income statements which informs you on cost of doing business, your gross margin and profits; and, finally cash flow budget which gives you a forecast of where your cash crunch times are likely. While the traditional reports are important in financial management they sometimes don’t provide enough information to help your business to grow exponentially. Later in the book I discuss the lifetime value of a customer. With your accounting software you are able to find out how much on average a customer spends and how often. You can also use the software to test the Pareto principle (the 80/20 rule) to get your best customers. Armed with this information you will be able to make more focused decisions that will lead to greater profits. What does financial management look like for the typical small business? Financial management in a typical small business is about looking at the history of your actual sales. However this is not enough. It is important to look at your actual sales so you can accurately estimate your output and assess the differing sales between your various products and services. Also it’s about determining how much profit you’ll make by selling Y amount of product at X amount of dollars over the same amount of time. Discounting may be one way to meet the competition but if you can’t increase volumes you might consider trimming some fat away, either though hitting fixed costs, inventory or less profitable lines. With financial analysis you may discover that there are some products or services that are costing you more to provide than you can ever recoup. You will want to run some different scenarios to determine the outcome of various price points for your product or service. Not all business owners will opt for a discounting solution. When your customer feels that the value they’re receiving from you is worth more than the money they are exchanging for it, there’s no real competition. You should be able to find a price that will work both you and your customers. However, the successful small businesses know that financial management is more than just profit. That true financial management is maximising your cash flow. Profit is obviously a large part of maximising cash flow. Cash flow also involves managing accounts receivables, stock, loan repayments and asset replacement. Every business owner needs to know that it is possible to go broke making a profit. Business should not be all that difficult. <> You need timely information and a system to produce reports. <> Today business needs to invoice quickly and have an efficient collection method. You need to follow up. Scenario The business was great at what they did. The provided quality products and their customers received great service. In fact they had many raving fans. However, the business did not have the strategies in place to hold onto the money coming into the business. They had grown organically over the years. Procedures that generally worked while they were small were now creating giant leaks in their profitability. While they were a small business anything that was not right could be easily spotted and fixed straight away without too much drama. However, the failures in the procedures became magnified but harder to control as they grew larger. I have seen this many times over the years in small businesses. The business will start off as a husband and wife operation. The way they do things are fine as they are both committed to the business and they can fix any problems easily as they aren’t too big. However, as they grow and hire more staff those flaws in those procedures become magnified. They no longer have the financial control over the business that they used to have. Before long they find they are less profitable then when they were small because of the poor financial controls. The previous year the business made a net profit of $32,000 on a turnover of $1.7 million. This is a low net profit % of just under 2%. By following a process and implementing profit strategies, the following year the business made a profit of $211,000 on a turnover of $1.8 million. The net profit % increased over 6 times to just over 12%. In the following sections we will use this scenario to outline the steps taken to maximise the business’s profit. You can follow these same steps to significantly improve your profitability and take financial control of your business. I would also recommend seeking help from a professional business advisor. A great business advisor will help you make more money, improve your cash flow and give you a significantly better business-leisure balance. Step 1: Develop a clear mission; build brand value through focus The mission is the ultimate purpose to be achieved by the business. The fans of Star Trek will remember their five year mission: to explore strange new worlds, to seek out new life and new civilizations, to boldly go where no man has gone before. This mission is clear, easily understood and provides guidance to those who are responsible for its fulfilment. Captain Kirk could use this mission as a reference point in all decisions he made. The business I worked with had been established for a number of years and already had a clearly defined mission. The mission was clear and well communicated to everyone. This made decision making, implementing strategies and communicating the need for these strategies much easier. However, this important step is often overlooked by small business. If your business does not have a clear and articulated mission you need to prepare one before following the rest of this process. You will use the mission as a guide when analysing the critical numbers of your business. Your business’s mission should be specific, easily understood and not too long. The elements of your mission: <> Define your customers – Be very specific. Too many businesses try to capture as many potential customers as they can. Consider factors such as the common problem they have, where are your customers and their income level. <> Define your products or services – What are you selling that is solving your customer’s problems? How are you positioning those products in the market? <> Sales or Profit objectives – Create specific and attainable goals. Example: Here is my mission from when I first started. The mission has changed as my business evolved. However, it gave me a clear focus and a reference point when making decisions. To provide quality business advisory services to small to medium sized businesses in the North Brisbane area. Business advisory services will help the business make more money, increase cash flow, improve sales and enable a better business-leisure balance. Profitability is to be at least equal to permanent position salary by the end of the second year of business. I also defined certain key terms: <> Quality will mean a high standard and not focused on cost. <> Small to medium business will include Mum and Dad businesses not in manufacturing and have been in business for at least 5 years. <> North Brisbane will include up to half an hour drive from home. <> Current salary is $80,000. This is to be adjusted with experience and market pressures. You don’t have a business; you have a brand Your customers don’t see your business; they don’t really care about your ‘mission’; they ‘feel’ the experience of dealing with your enterprise and they ‘think’ brand. Your brand is not just your logo and tagline. If the sum of all the interactions, thoughts and feelings of the brand form the perception reality of the brand, then ultimately every single thing communicates the brand. This premise is fundamental to determining brand success. By realizing that everything communicates, then you realize that the role of communicating the brand to its audience is not just the role of a marketing department or an advertising agency. It takes every interaction at every level. From the way a shop assistant delivers a service in a department store, to the way a person signs for a loan document to buy their first home from a bank. People, paper, websites, uniforms, product disclosure statements, forms, and systems operations everything forms an impression that results in how a person thinks or feels about a brand. This is why a laser focused mission is vital to your business. The mission is your reference point that ensures all your marketing and communications is consistent. It is this consistency that customers want; they are comforted to know that their current experience will be the same as their last experience if they enjoyed it. By using a mission your decision making will become easier, more effective and efficient. For example, you will know if a marketing opportunity will target your ideal customer. Building brand equity Example: The case of the missing coffee How come when I go to a café that sometimes when I get bad service I don’t mind, but I when I go to a different café and get the same bad service it really annoys me. This morning I went to a café that I’ve been going to for years, and today, they young girl who took the order forgot to order our coffees. Its morning and I love coffee! I called her over and asked her politely if she’d put the order through, and she’d forgotten. Then our breakfast came, I received nice scrambled eggs, my son got his poached eggs, but my wife received nothing. She’s forgotten to order my wife’s breakfast. We asked for the order and we waited a little bit before it arrived. It’s a regular café for my wife, so the sum of all her previous experiences outweighed this singular poor experience of service. It meant that the café’s brand had generated an amount of equity in her mind that allowed her to excuse poor service on this occasion. However, if she goes back next week and experiences a similar performance, at what point does the negative impression outbalance the positive in her mind? Delivering on expectations, keeping promises The weekend before, I was at a quite expensive café, no table service and nobody at the register with three people lining up for service. Waiting for a few minutes only to be interrupted by a stressed out looking waitress asking me to move out of her way. Why did this upset me more then not us not receiving our order at the other café? It’s because I’m not a regular, my experience set is limited and people are quick to judge. And this initial experience compromised my sense of expectation. I could not justify the wait (and attitude) to the expectation of service and price. Without a bank of positive experiences to draw back on, I was quick to judge and quick to leave. You don’t get a second chance at a first impression. So the brand comes to life at every single touch point, every single time. In the way the coffee is made, the attitude of the staff the overall package of the experience because everything communicates. Can you see how that bank of good [...]... cost and then measure the leads / sales you are getting from the campaigns you are doing One of the principles that we assert here is that it’s not about the next sale to a customer; rather a customer has (or should have) a lifetime value That’s the amount of revenue you’ll generate from one customer over the lifetime of your engagement with them minus your costs to acquire them and then service them over... profitably – better than any other model of the business, i.e its competitors And then the prototype is put in the context of a larger, expanded business The turnkey solution When you buy a new car, you don’t expect to have to open the bonnet and fiddle around with the bits under the hood You should just turn the key and start driving That’s what the word ‘turnkey’ means In the business world, it refers... Gerber is an entrepreneur guru and the author of the book titled The E-Myth He often talks about how 80% of businesses fail in the first five years Most people become sick of working for their idiot bosses, as they call them, so they decide to start their own business and they end up becoming the idiot boss Instead of working five days per week for a guaranteed pay cherub they now get to work six to seven... hours and seeing very little reward from their hard work The one thing these business owners have in common is that they don’t know the CRITICAL NUMBERS for their business These business owners rely on instinct or what they have done in the past to make their financial decisions However, this can be a recipe for disaster According to ASIC Insolvency statistics the top reasons for companies failing are... them If McDonald’s was going to thrive, Ray Kroc had to find other people to do the work But once the prototype was effective, Ray Kroc and the McDonald brothers would no longer work in the business In effect, the employees do the technical work – both manual and managerial – and the owners are left to do the strategic thinking Of course the Kroc approach is not restricted to a food retail store –... customer each year for the time they remain your customer Assume that each year this amounts to $30 per month The cost to service them over the span of time as your customer is $1,260 ($30/month x 12 months x 3.5 years) The lifetime value calculation In the most simple calculation, this would represent a customer lifetime value of the revenue generated by that customer over the 3.5 (or the average lifetime... So ask yourself, is there a need to go back to any of these steps? About Beyond the Numbers We specialize in helping businesses turning their hidden assets into cash flow, then maximizing the money the business keeps Small Business Financial Strategists Beyond the Numbers works with business owners who are tired of working long hours for little money Typically the primary focus of their business is to... provider and you know that the average customer spends $100 a month on your service Over the course of 12 months, you generate $1,200 from the typical customer But that customer doesn’t stay with you for just 12 months; they stay with you for 3.5 years The revenue you generate from them over the time that they remain your customer is $4,200 ($100/month x 12 months x 3.5 years) There is a cost to service... McDonald’s, there had to be systems and procedures in place to allow replication of this proven operation Neither Ray Kroc nor the McDonald brothers could become the key workers There had to be a prototype that could act as the model for replication and expansion For the business to thrive, Ray Kroc had to put in place not just systems and procedures, but employees and some organizational structure around them... Having a great website matters These all matter But, none matter as much as the company's ability to answer the question, "Why buy from us?" Ultimately, the foundation of every customer purchase is something amazingly simple: competitive advantage People buy the products and services they do because they see a real and compelling advantage over all other available choices The problem is that too many . start maximising their profit at the level they are at now. When the business has financial control increasing sales won’t like be chasing the wind but will. financial control over the business that they used to have. Before long they find they are less profitable then when they were small because of the poor financial