A: To answer this question, you need to evaluate several interrelated facets of your business. The first step is to take a careful look at where you stand. What is your current sales volume? What kind of margin is that producing? How quickly do you collect your accounts receivable? If you maintain inventories, how many times per year does your inventory turn? The answers to these questions are a start to help you determine the money available to you.
Next, consider how much you’ll need to increase your fixed overheads in order to handle the anticipated growth. Will you be moving to a larger facility? Will your selling expenses go up? What other costs do you expect to increase?
Based on your answers to the above questions, you can now begin to prepare new financial projections. The income statements, balance sheets, and cash flow projections that you develop will tell you if and when you’ll run out of cash.
A: Do you have a current banking relationship with a credit line? If so, start with them. Explain your business plan to them. Show them how much additional cash your plan requires, and why. If you haven’t already established a line of credit with your present bank, you should approach them about setting one up. When you develop a solid financial plan, banks can see why your company is a good loan customer.
A: Working capital is the difference between your current assets and current liabilities. Obviously, the assets should exceed the liabilities-if not, your business is in trouble.
The key to a good working capital position is to keep the timeframe for collecting your receivables to a minimum and manage your trade credit terms to the max. You need to analyze how profitable your business is (and how profitable it could be), how quickly you collect receivables, and how long you take to pay vendors. If you have inventory, you should also look at how much money you have tied up in inventory and calculate the turnover rate.
For example, if you allow your customers and clients to take up to 60 days to pay you, but you pay your vendors in 30, you’re unnecessarily restricting your cash flow. You can increase your working capital by synchronizing your accounts payable and receivable and by making your business more profitable.
A: You can free up a lot of money by reducing your inventory, but you don’t want to run out of essential items. You need to systematically classify every item you have in stock. Divide them into three categories:
A = Items that turn frequently (e.g., every week or month)
B = Items that you occasionally use
C = Items that are old, slow-moving, or obsolete
You need to keep a healthy stock of all your A-list products. For items on list B, investigate potential alternatives. If you can find a supplier who will let you buy these products on demand, you can eliminate them from your inventory. The items on list C you should flush from your facility entirely. Sell them for any price you can get.
A: The decision to sell the business you built is never an easy one. You need to compare your profits to the money you could make if you pulled your equity out of the business and invested it somewhere else. If you’re not making more money from your business than you could from a more traditional investment, then you need to ask yourself why you’re in the business. You may have deep-seated personal reasons for holding on, but if you can’t increase your equity, you’ll never retire.
Consider independent guidance to help you sort out alternatives, including making the business more profitable, preparing the business for sale, or helping you identify a strategic alliance that could enhance the value of your business.
A: “Infrastructure” is about people and processes. Start by examining your back office procedures. How do you handle transactions such as inventory, accounts receivable, accounts payable, and job costing? Are those processes handled with maximum efficiency?
Next, take a look at your front-end operations. Do you have the talent to help you build increased volume? Does your staff have the right attitude-are they ready to help you change the infrastructure? And are they able to take on more work? How much will you need to increase your sales force to handle the growth you anticipate? What kind of background and talent will the new hires need? What changes are needed in your facility to make it more productive?
You may find that in order to grow your business you need to lower your profit margins. Price out your expected volume and margins, subtracting your fixed overhead to determine your operating profit. You need to identify your drop-dead number-the lowest price you can charge and still have a high enough margin to cover your overhead expenses. Then you can create multiple scenarios, projecting how different prices and profit margins could impact the growth of your business. This process will help you determine which alternative you should carry out.
A: Your break-even point is the level of sales that produces neither profit nor loss. You can calculate your break-even sales using the following formulas:
Gross Profit Margin = Sales – Variable Costs
Gross Margin Percentage = Gross Profit Margin / Sales
Break-Even Sales = Fixed Overhead / Gross Margin Percentage
For example, if you generate $100 in sales and your variable costs are $40, you have a gross profit margin of $60 ($100 – $40), or 60% ($60 / $100). But if you have $50 in fixed overhead, your net profit is only $10 ($60 – $50). To determine your break-even point, divide your fixed overhead by the gross margin percentage:
$50 / 60% = $83
This means that if you generate less than $83 in sales, you will lose money instead of making money. By defining and lowering your variable and fixed costs, you can improve your overall profit structure and lower your break-even sales point.
A: You can calculate your profit margin and mark-up using the following formulas:
Profit Margin = Selling Price – Variable Costs
Margin Percentage = Profit Margin / Selling Price
Mark-Up = New Selling Price – Old Selling Price
Mark-Up Percentage = Mark-Up / Old Selling Price
Let’s say it costs you $80 to produce an item, and you sell it for $100. Your profit margin is $20 ($100 – $80), or 20% ($20 / $100).
You decide to raise the price to $115-a mark-up of 15% ($15 / $100). Your variable costs haven’t changed, so your profit margin is now $35 ($115 – $80), or 30% ($35 ¸ $115).
If, on the other hand, you maintain your $100 selling price, but you are faced with a 20% mark-up in your variable costs, then it now costs you $96 ($80 x 120%) to produce the item. That reduces your profit margin to $4 ($100 – $96), or 4% ($4 / $100).
A: Once you get the price-cost-volume relationships down on paper, you can begin to play with these factors. Scenarios can be created to help you sort through the calculations and envision how various factors will affect your profit. You can look at peer groups and industry averages to estimate what the market can bear, then take into account fixed overheads to come up with a desirable pricing scheme.
A: There are four ways to increase your sales:
- Increase the number of customers
- Increase the frequency of transactions
- Increase the average transaction value
- Improve operating processes for better efficiencies
Do you know how many customers you have, how frequently they buy from you on average, and what the average transaction value is of those sales? If not, you need to pull together your records.
Once you know where you stand, you can evaluate the situation to determine where you should direct your focus. You may decide that you need to redouble your efforts to increase your customer base… or you may discover that the best way to increase your sales is to look for new ways to generate more frequent or more higher value purchases from your existing customer base, perhaps by enhancing or expanding certain products and services.
A: There’s a well-known rule in business, known as the Pareto Principle, which states that 20% of a business’s customers typically account for 80% of their sales. It’s definitely worth your while to focus your resources on cultivating your top customers. You may even want to “fire” some clients so you can better concentrate your efforts where they’re most likely to produce results.
Just as you can reduce your physical inventory to free up your cash, you can clean out your customer database to free up your resources. Start by dividing your customers into three categories:
- A = Customers who buy frequently
- B = Customers who make occasional purchases
- C = Customers who have failed to respond to your sales and marketing efforts
The customers on your A list deserve the most attention. You may want to target them with special offers and campaigns. You’ll also want to maintain contact with your B-list customers, but don’t squander excessive time and money chasing those on your C list.
A: A number of factors come into play when it comes to the productivity of your sales team. First, it’s important to understand that your sales force will be much more effective if they understand where they fit in. You must prepare them in such a way that they understand the company’s numbers. Make sure you fully educate your sales staff about your sales mix, product lines, service lines, and margin mix. Second, you should look at how your salespeople are compensated for their efforts. Do they receive a commission on sales or a share of the profit margin? There may be things you can do to increase their motivation to sell.
There may be other issues that you need to address in order to enable your salespeople to be more successful. For example, you should examine your fulfillment process: are your services or products delivered efficiently? Are your customers satisfied with the service they receive? Research shows that it costs six to seven times more to attract new customers than to keep old ones. Businesses that provide superior customer service can charge more for their products and services, realize greater profits, and increase their market share. It’s much more cost-effective (and profitable) to devote more time to customer retention than to prospect for new customers.
If your closure rate indicates your sales force is struggling, you may want to consider investing in an outside sales training consultant who can help your salespeople focus their efforts.