The Expense Problem

We have talked quite a bit about the Revenue Side of a Business Plan. I want to cover part of the expense side of a business today and that is the Operational Expense or OPEX. OPEX generally represents the fixed cost of a business. This means all the costs that a business would have if it did not sell anything (NOTE: I am using this as a simplification, because yes this is not the precise definition but works very well for small businesses). This would include rent, utilities, most salaries, insurance, and similar items. Cost of Goods Sold (COGS) is the other kind of expense and that is generally reserved for the costs associated with delivering services or the costs of making products. There can be some tricky overlaps, but things will be okay if you are consistent with the way you are accounting for these costs.

The first problem is inflation. Every year the costs to run a business tend to go up. This might be the cost of advertising or health insurance. But these costs can be just about anything. When I was at AFC, we estimated these costs to go up about 7% a year. This leads to a loss of profit year-over-year without some changes. The easiest change is to increase revenue to cover these cost increases. However, there may be other ways that can be used to lower these costs. These will be covered in a separate post but become many of the initiatives that happen within a company.

The second problem is one of accounting. As I said about the challenges with defining OPEX and COGS above, there are other problems in evaluating costs in small business. The one that is most likely is the personal costs that are run through the business. Some of these are widespread. An example would be the expense of the family’s cell phone plan as an expense to the business. There are more difficult problems as well. For example, I was evaluating a company in southern California where the owner ran a $190K "Tennant Improvement" for his "Home Office" through his business. Because of this (and other expenses), the owner can dramatically underpay himself. All of this is good for tax purposes but can make objective analysis of the business difficult.

So, we will be spending time looking at expenses and how they can be looked at separately and together with the Revenue side of business.

Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

Other Revenue Growth Mechanisms

We have looked at some mechanisms to understand Marketing and understanding the finances of attracting customers.  Now we want to look at the other part of the equation or the Life Value of a Customer (LVC).  We want to look at increasing the value of a customer by increasing Revenue through increased average Sales or increase the frequency of Sales.

To do this, I want to focus first on a Hair Salon as an example.  One of my first clients was a Salon and one thing that I found was that the Salon made its real money from Color Treatments.  This leads to a periodic visit by customers to the Salon.  One thing that can directly impact Revenue is the rebooking of appointments at 4 weeks instead of 6 weeks.  There are several ways to impact this.  For example, the cashier function can ask to book appointments at the exit and suggest a 4-week interval.  There is also the choice of a "Cut of a Month Club".  This is a discount card that can be used to encourage use on a more regular basis.

This can be enhanced by looking at the sizing of the products that are sold.  Since Product Sales are a great upside, the Salon wants clients to purchase each time.  The idea here is to stock sizes of products that are about one month's worth of product.  Running out of products can provide a prompting to book another hair appointment.  There are other reminders that can be done by E-mail, Telephone, or Direct Mail.  All of these ways can be used to decrease the time between appointments.

Here is one last idea for this example.  The most important thing is to get new clients to become repeat clients.  They are the most important prospects for becoming new repeat clients.  The question is what the Salon does to cultivate this new relationship?  If there was ever a time for a Salon to give a discount, it is to that first-time visitor.  But there are many ways to cultivate the client.  For example, send a hand-written note to them thanking them for their visit.  Any personalized touch can be an excellent way of improving turning that one-time client to a repeat client.

Now, why did I focus on creating repeat clients?  Prospects that have already done business with you have the highest conversion rate.  These prospects are better than referrals.  Think long and hard about how to convert customers into repeat customers.

 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

How does Customer Count Impacts a Business?

 

Last time, I posted about the number of Customers that you need to have a successful Business.  This week I want to show how this greatly impacts a couple of parts of a company. As I have said, most any type of company can be made to work.  The question is what you must do is think about how to make it work.

The first metric to think about in this mode is the "Cost of Customer Acquisition" (COCA).  The way to figure this out is to divide the spend on Sales and Marketing by the number of new clients.  If you spend, $10,000 on Sales and Marketing and have 100 Customers, then your COCA is $100.  This number is important because it defines how much value each customer costs you incrementally.  If you are selling a haircut for $20, then $100 COCA is a bad number.  If you are selling Luxury Yachts, $100 is an awesome Cost of Customer Acquisition.  A good COCA is very dependent on the business.  But think about it.  If you need lots of customers, then COCA needs to be very efficient.  Many customers mean that you will be acquiring them often.  Processes that are repeated regularly, the more efficient the better.

Another aspect of customer count is Billing.  The more customers the more important that is.  Many businesses use Merchant Banks to accept Credit Cards as the primary form of payment.  For example, a Hair Salon may have 100 customers per styling station per month.  With an average spend of (for example) $100, that means that there could $10,000 of transactions.  Each 1% of Merchant banking fees is $100 in this example.  Credit Cards make is simple to receive cash quickly and can isolate businesses from many payment issues.  However, Credit Cards are a relatively expensive way of collecting payments.  There is a tradeoff between the number of invoices to issue, the timing of payments, and the method of payment.  All of this depends on the number of customers that a business has.

These are two of several processes inside a business that are impacted by customer count.  All these processes need to be accounted for in the Business Plan as it is developed.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Time and the Path Forward

I have posted about the top 3 things that make businesses fail.  Now I want to talk about the primary wake a business succeed:  Time!  I know that sounds a bit crazy.  But in the end, companies that use Time well are those that make great businesses.  Let us look at our 3 negative factors.

Capital is required to perform functions efficiently.  Underfunded Companies bottleneck themselves.  I was talking to a prospect the other day about challenges with his Marketing.  He expressed a Time Crunch to get the work done.  We talked about a part-time position that he could use a College Intern to do.  He had considered other options but they were all "too expensive".  Not Marketing efficiently is "too expensive".

Sales and Marketing are all about bringing good prospects to your business and converting them into Clients.  I had a client that was searching far and wide for customers but had a place of business right next to 250 ideal prospects.  I got her to understand that she should focus her marketing on that 250 before she expanded out to other audiences.  This helped make her business grow and thrive quickly.

People and Organization are all about scaling effectively.  I have a client who was always looking for entry-level employees.  I showed him a way of hiring higher end employees to manage sub-contractors.  This allowed him to expand his business by 3x in profit over 2 years.  Having the right people and having them do the right jobs is the way to build a path forward.

If you want a positive initiative, then build a living business plan (not just one that sits in a drawer).  You can write measurable objectives and hold yourself accountable for meeting them.  You can see where you are off-track and correct your course to hit your goal.  It is the right thing to do and will help you spend your time on the right things.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

http://www.jimsackman.com/

Do You have the Right People?

We have talked about the challenges of Finances, Sales, and Marketing.  Now, we come to the last of the big 3 company problems:  People.  For most companies, people directly contribute to about 70% of Operating Expenses.  That means having the right people and employing them properly is a top priority.

To start with, this means that the people in your business need to understand their job descriptions.  Many small businesses do not have formal job descriptions and employee handbooks.  You should consider that unless you tell people what you want them to do then they will what they consider is correct.  The first step here is to define the job and the rules of employment.  By doing this, you provide a shortcut to productivity increases.

The second thing is that there needs to be a model for delegation.  I prefer the Trust Model of Delegation.  This means that people are given more discretion and more freedom over time.  This needs to start with what I call Bright Line decision making.  When you have a new employee or an employee in a new situation, give them Bright Lines to make decisions with.  Things that fall out of those stark choices should be escalated.  This gives the employee a front row seat to you making decisions and the reasoning behind it.

Finally, on the topic of decision making, this is the place for Mission, Vision, and Values. By guiding your employees to what is important to you as a business, you make it more likely that they will make decisions the way you want them to.  Remember, they represent you in the public. You need them to represent you as you want to be represented.

If you are a sole proprietor, this extends to any partners and vendors that you have.  You need to be sure that they are clear on what you are doing and their role within it.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Do You Have Enough Money?

We have been walking through why Small Business fail and this is one of the big questions.  In a technical context, I would argue that most startups are undercapitalized.  They don't really have enough money to start their company and struggle before it can become profitable.

Why is that?  So many people that I talk to don't have any financial background and have little interest in learning.  This means that they are unable to create an estimate for the startup costs of their business.  I normally run into them when they have an idea and ask me to work for a percentage of the company or for free/barter.  I know that you are now thinking, "Is it that he has not been able to demonstrate a value proposition?"  That may be true some percentage of the time, but I know many cases where they just did not have the money.

Let me give you an example.  I met with a Woman who wanted to start an Alzheimer's Care Center.  This center would be located on a farm so that they could grow their own food.  This was to provide the residents with animal interaction and organic food.  I asked if she had a property in mind.  I was not sure that such a property would be available for sale and she might have to build.  I also was unclear on the insurance and liability issues involved by mixing two industries as she wanted to.  Her plan was to keep her full-time job and run this facility.  She needed her job to pay bills while this facility was starting up.  In the back of my head, I expected that this would take $5M - $10M to start. 

Now I recognize that this is an extreme case, but I have a multitude of lower end examples.  They ask for my help in developing and sometimes writing the business plan.  When they find what I charge for this, they turn white and say thank you.  I know that I am not unrealistic in what I am asking.  They are asking for anything from 10 - 100 hours worth of work and want me to take less than $5/hour.  If you are in that situation and cannot afford to get professional help in areas like bookkeeping and website development, then you need to consider whether you are doing the right thing.

So, if you don't know how to create a budget and estimates for a 2 - 3-year ramp-up phase of the business, then expect to hire an expert (like me) to do them.  Unless you are my personal friend, don't expect my help for free.  If you cannot afford that help, do something else until you can afford it.

Thanks, and have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!