Business owners need to be problem solvers.
“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.