Profit is Sanity

What if?

What if we were to increase our prices by 10%? How much business could we afford to lose before we actually had less profit than before?

What if we gave ourselves a marketing budget of £10,000? How many extra sales would we have to achieve to recoup the extra cost?

There are plenty of “What ifs” in business but how often do you sit back and calculate in detail the financial effects of certain decisions. Most small businesses are run on gut feelings and instinct, all very well with the experience that you have built up over a number of years running a business but yet another example of how the business is completely dependent on you.

What if the business is in trouble and you can’t see how to get yourself out of it? At the end of the day there are only four ways financially to improve a loss situation. Make more sales, improve your margins, reduce your overheads or take less money for yourself. We’ll assume for the purposes of this debate that you don’t want to do the last one and you have probably considered the third one so that leaves the first two. Measuring our performance and perhaps benchmarking ourselves against others in the industry are just some of the ways of helping find out what you are doing wrong.

But what if you are doing everything right for the industry you are in but we are just in the wrong industry? Sometimes it takes an outsider to see what those that are too involved in the day to day running of the business are too close to see. A well-known pen manufacturer thought it was in the stationery business until someone pointed out that they were actually in the gift industry. Once they realised that, re-marketing themselves and increasing all their prices was easy.

At the end of the day there is no one that knows more about your business than you. You probably know more about your industry, employees and products than anyone else ever will, so you are the only person that can come up with the answers. But what if you had an outside adviser that was able to ask you the right questions?

I’d just like to thank…

Picture the scene. Its five years into the future. You are at a black tie event with everyone dressed in his or her best outfits. The head of the local Chamber of Commerce has just read your company’s name out as being the winner of the best small business in your area. You walk up to accept your award and think back over everything that has happened in the last five years.

What was it about your business that led the judges to award you the prize? How did you get your company out of the rut that it was in five years ago? Who were the people that you worked with in that time that have contributed to your success?

OK, reality check. Not everyone can win awards and not everyone wants to. Most people have their own personal objective that could be more to do with quality of life or financial rewards than prizes in business competitions. How are you getting on achieving these objectives? Will you be where you want to be in five years time?

If your objectives are financial then a good start should be reliable and relevant management information. If you have no other methods of measuring performance then using your monthly management accounts as the basis for discussion will be your best start-point. Accounts will help you understand the key performance indicators that make your business tick.

It is well known that there are only four ways to grow a business:

• Increase the number of good customers
• Increase the transaction frequency
• Increase the average transaction value
• Improve your business processes and the efficiency of your people

If you are going to achieve the five-year goals that you have set yourself, focus on these areas must be a fundamental part of your plans. Each of the above points should lead you to ask certain questions of yourself. What defines a good customer (to you)? Can we increase our product range to encourage people to buy more often? Can we stretch our services or products so that customers buy more added value items?

These questions are the tip of the iceberg but they are a start. Once you begin this process who knows where it will end? A trip to get measured for a dinner jacket perhaps?