Free Advice

Business owners need to be problem solvers.

Originally published in, and reprint permission granted from, The Eastside Journal, June 17, 2000.

“Things happen.” Sometimes good things and sometimes bad things. If either event if not handled correctly these “things” can lead to business problems.

Here are two real-life examples and what the owners did to fix the problems.

Bob owns a distribution business selling industrial equipment and parts. Two years ago he lost his primary line when another company acquired his supplier. The new firm decided to have their own sales offices rather than use independent distributors. Then his top salesperson left.

Bob went into a funk and pretended it never happened. He snapped to attention about one year later when a company approached him about acquiring his business. Awash in red ink, he realized he had nothing to sell.

We concentrated on three areas:

1.       Expenses

2.       Inventory

3.       A sales plan

The employees admitted they were overstaffed. This problem solved itself when a warehouse person and one salesperson gave their notices. In analyzing sales we realized that at least 75% of this salesperson’s sales were repeat orders that came directly to the head office with no effort on his part. The owner and staff could easily cover these accounts.

The firm was having problems paying its bills and numerous vendors had them on COD. Sales were down and inventory was up to at least double, and probably triple, what it should be.

A marketing plan to sell from inventory was implemented. Within three months the company reduced inventory by over 30%. It was about that time when the owner commented how the cash crunch was easing up. No wonder, by selling off inventory the company had generated cash equal to two months of payables.

We implemented a sales plan for the owner and other sales people. Selling products with a short sales cycle, selling products in inventory and using the telephone to pre-qualify prospects before driving to see them were first addressed. In just the second month after this started they had their first profitable month in almost two years.

When I met Jane her business of 15 years was in shambles, even though sales had taken off. She was working too much and not paying herself a dime. Her company had too many employees, they squabbled and the overhead was out of control. I remember a comment she made, “If I could sell my business and have a zero net (owe nothing, have nothing) I’d be very happy.” I reminded her of that remark two years later after she sold her business. She received a sizable down payment and had the opportunity to collect a mid six-figure amount (purchase price and employment agreement). We started by reducing staff, outsourcing variable-cost items and turning her emphasis to sales, which is her strength. She started making money, which improved her mental state and disposition. This also benefited her greatly at the time of sale.

Over the years her overhead had doubled but there had been no thought to justifying any of the added costs. A simple breakeven analysis would have told the company they were moving too fast.

Here’s an example of what I mean. Divide the new cost by the gross margin percentage (sales less cost of goods sold) to determine how much sales must increase to cover the new cost. If a new employee is added at a monthly cost of $3,000 and gross margin is 40% then sales must increase by $7,500 per month just to cover the cost of the new employee ($3,000/40%).

If you don’t think you can quickly increase sales by $7,500 perhaps it’s not time to hire a new person.    Another problem was the firm was not getting enough sales from existing customers. In fact, they got very little repeat business because the owner loved the thrill of the hunt for new customers.

By analyzing the amount of business a customer was worth after the initial order we could rank them by the likelihood of future purchases. We then designed a marketing plan to stay in touch with them. A staff person was assigned to exiting customers. That employee’s compensation is tied to sales to these customers.

© Copyright John Martinka 2000-2001. All rights reserved.