PODCAST EPISODE 4 TRANSCRIPT: Hello and welcome to GROW FOR IT! I’m Jim and this is a business podcast designed for small business owners, managers and other professionals. My goal is to work in the space between your ears – on your mindset – to help you focus on the actions and activities that help you to move closer toward your vision.
In today’s episode, we’re going to discuss a couple ways to use your financial reports, breaking down your customer segments and I’ll even give you a few tips on maximizing your profit margin.
But first, let’s quickly review what we covered in the last episode. In episode 3, we discussed a SWOT Analysis and how it can help you in your business planning. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The objective is to identify internal strengths you can leverage to take advantage of external opportunities, while minimizing the risk from external threats.
We’ll continue to focus on your vision and developing aspects of your business plan and daily activities to help you arrive there. So now, let’s get ready to GROW FOR IT!
The simple truth is Business Planning can be as high-level or as micro-specific as you want it to be. The company size, the organizational focus, even your specific role can benefit from a Business Plan. However, none of these really determine how complex your planning has to be. The fact is, if you’ll invest more time upfront, you’ll have a better chance of achieving your goals and moving closer to your vision.
We can’t get time back, so momentum, focus and velocity are typically to your advantage – SO LET’s PREPARE!
Can you over do it? Sure, it’s possible. True story, I once had to give a 4-hour, sales territory review as part of our annual planning and budgeting process. The overhead slides (yes, that’s how long ago it happened) were full of:
- Industry segment breakouts and penetration,
- Key clients and target clients,
- Specific products and services,
- Geographic overlays,
- Pricing roll-ups and a lot more.
Personally, I thought it was a bit much at the time – and still do today. It took 4 hours to grind through it with several layers of managers. However, to be successful, it’s better to put at least some effort into it.
The exercise, and the discipline, will usually uncover valuable insights. Recently, I had an article about business planning published by the Louisville Bar Association, Kentucky Doc Magazine and the Kentucky Psychological Association. It’s time to jump in.
Start with a post-mortem.
The best way to begin is to do a DEEP DIVE on your financials for the previous year. I’m not talking about just looking at your Gross Revenue and Net Profit. You’ve got to go deeper.
I recommend you break the numbers down by client segment, service and vendors. YOU HAVE TO KNOW YOUR METRICS!
To get started, yep, just like I’ve asked in previous episodes, I want you to take out a sheet of paper. In fact, take out a few of them.
Now, I only have a few minutes, so let’s go high-level for now. There’s a lot of ground to cover today.
Down the left-side, list your various client segments. How you divide them is up to you. Consider:
- Type of issue/case
- Type of business
- Age or Economic Group, etc.
Group them into whatever categories are most relevant to your business.
Then, across the top, make a column for Total Revenue, one for Total Cost to Serve/Supply (in accounting terms this is called your Cost of Goods Sold), another for Margin Percentage and then one for Margin Dollars. These basic calculations are pretty straight-forward.
Let me caution you here. People like to get very enamored with margin percentages. “Hey I’m making 38% on this product!” The reality is you don’t pay your bills with percentages. You pay with dollars.
It’s always about the margin dollars!
For instance, if you sell a product for $1, but you had to pay vendors $0.60, your margin is 40%. But remember, you really only made $0.40. What will it take you in time, carrying cost, effort and a host of other “soft costs” to sell a few of those units? Try as hard as you like, it’s still only $0.40. You’d better get busy.
Another column you need to factor into your client analysis is your effort. Sometime that’s referred to as “man hours.” You may find that a certain client segment simply requires too much effort to service effectively. This can be a relative numeric ranking, based on the time it takes to work with each specific segment.
Remember, time is finite. Are you incurring large opportunity costs to service that segment?
We’ve all had that client who just plain wears you out. Maybe the best thing for your business is to help that client to hire a competitor. The Chinese have a saying: “May your year be an interesting one.” That’s not always said in an effort to wish you well. It might be time to consider making it an “interesting” year for your competition.
As you stack-rank your client segments, you can quickly see which deliver the most profit margin to your bottom line. Simply looking at gross sales by segment can be very misleading. Topline revenue is only part of your business formula. I won’t tell you it’s unimportant, but it’s definitely less important that net margin, and ultimately net profit.
You want to fully understand who is driving your margin! The next step is to align business activities to focus on those client segments, products and services.
What you’re really looking for are your sweet spots. Which activities deliver the most margin dollars, for the least amount of effort? How can you do more?
Equally as important, which activities deliver the least amount of margin dollars? How can you do less of them?
Put your pen down for a minute. I want you to think back to when your mom was preparing to give you a bath. For some of you, it might be easier to think about the last time you were doing this for your kiddos.
Did you turn on just the cold water, fill up part of the tub and turn it off? Then, just the hot water and later turn it off? No, to get it right you have to blend and adjust. The same goes for your business planning. It’s typically going to take time to realize the benefits of these adjustments. But like anything else, the sooner you start – the sooner you’ll finish.
Time to switch gears. Let’s talk about your vendors.
Engage Your Vendors
You can do the same type of analysis for your vendors. You really want to identify a few important facts. How much are you spending with each vendor? How easier is each one to deal with? Are they responsive?
Consider this: Did you leave money on the table last year? Are there discounts or rebates you simply didn’t take advantage of? Make a note to start asking each vendor about various programs, discounts and rebates. If there’s free money on the table, you need to figure a way to get your share of it!
Another fact involves the contract expiration dates for services provided by your key vendors. Add those to your calendar. Don’t forget to set a notification for at least 1 month before that expiration occurs. These are important vendors. You don’t want to make snap decisions, so give yourself time to evaluate performance, price and support-levels.
You now have a roadmap for setting the proper expectations and understanding which relationships need work.
Engage them! You might be extremely surprised at how eager they are to help. They may even come up with a better solution, based on your improved communication and a more complete understanding of your situation.
Why Discounts Are Never Win-Win
We talked about determining if you left money on the table with your vendors. If you’re selling a product or service, let me encourage you to move away from Discounts.
Discounts give away margin for the same amount of work. The buyer always wins. More importantly, there’s no guarantee they’ll repeat the purchase.
The better solution is to develop a Rebate Program. It doesn’t have to be complicated. The advantage is that you’ll remain in control while guiding a buyer’s activity toward your desired outcome. This may be a repeat purchase, or the adoption of a new product, etc. It may include product or service bundles, incremental purchases, referral bonuses, and a whole host of other incentive options.
The savings is still there, as long as the buyer (or client) achieves the rebate milestones. More importantly, if they fail to perform, you still maximized your margin on the product or service the bought.
Doesn’t that sound much closer to a win-win? Remember, it’s always about the margin dollar.
Over the past 20+ years, I’ve helped to both develop and implement rebate programs in several industries. If you need help getting the process started, contact me via my website.
Well, that about wraps it us for today. There’s a lot more to this topic. I know finance guys are probably pulling their hair out. If you’d like to go deeper on the financials, we can easily arrange time to get together.
As always, I want to say THANK YOU for sharing a few minutes of your time with me. There are related blog posts and videos available on my website: JimRayConsultingServices.com.
Let’s connect on my business Facebook page. It’s Jim Ray Consulting Services.
Finally, can I ask a favor? If you liked what you heard in this episode, please consider going to iTunes and leaving a 5-Star rating. That and any Review comments have a big impact on helping this podcast rank well, so others can find it.
For now, go take a look at your financials and start developing your plan. I’m Jim Ray and if you’re ready, let’s GROW FOR IT!