WHY DON’T SCHOOLS TEACH BUSINESS HOPEFULS TO USE CASH FLOW TOOLS?

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Imagine a business, if you would, that shows decent margins, low debt, and slowly growing sales. Bankers examine the financial statements declare that the company is in good shape. “Carry on and keep up the good work,” they say. But … Continue reading

Results Based Pricing for Professionals

I have just read an article from November of 2013 (Managing Partner, published in New Zealand) about pricing for professionals. When surveyed about how they charge, most professionals shrug and admit that they charge what everyone else charges. It has reminded me to put value and choice at the very top of the list of how to devise winning pricing strategy that will increase profits.

shrugPricing professional services is a big problem for lawyers, accountants and anyone selling services. Professionals deal in results, but they charge for effort. The easy route is to charge by the hour but that makes it easy for a potential client to compare apples to apples. AB charges $125 per hour. BC charges $250 per hour. Therefore, AB is the best buy. But is that true?

So, would you buy a house based solely on price? House F is small, rundown, needs a roof and is in the middle of a rough neighborhood. It is listed for $229,000. House G is much larger and in a nice neighbourhood. It is occupancy ready and most importantly, your wife likes it. But its list price is $400,000. Which house has value?

In order to place value on a service for hire, the trick is to comprehend that the customer does not care about the amount of time, effort and sweat you expend. They want results. And what is the result they want? Do you ever ask? Where will the customer place the most value? Speed of service? Accuracy? No jail time? Or will  they respect the weekends you spent on their file, the late nights and the cost of years of schooling?

So we establish, state and then highlight the value on the table, first, right? But now what?

In order to get your price, though, you must offer choice. Like Goldilocks , the choices must be few- not too high, not too low and just right. Choice in pricing will allow you to take clients and customers with all kinds of budgets and thickness of wallet, without discounting. The platinum package will have the largest assortment of bells and whistles. The gold package has fewer bells and only one whistle but has a lower price tag. The workmanship is still present, but the results are fewer. The bronze package is the budget offering with the lowest price and the fewest bells and no whistles at all.

Want to be more profitable? Be brave and get a better pricing strategy.

IBM predicts the return of local brick-and-mortar retail to prominence over e-retailers

IBM’s “5 in 5″ series presents ideas about how life will be affected by technology over the next half decade. A video series provides the highlights, including this one that predicts the return of local brick-and-mortar retail to prominence over e-retailers that have been “spanking” them for years.

watch video at http://www.profitguide.com/industry-focus/retail/will-brick-and-mortar-retail-prevail-in-the-end-60600?

IBM’s release says:

“This year’s 5 in 5 explores the idea that smart machines will learn, reason and engage with us in more natural ways–helping to amplify human abilities, assist us in making good choices–big and small, and help us navigate through life.

Within five years, we predict buying local will beat online. Savvy retailers will use the immediacy of the physical store to create experiences that simply can’t be replicated by online-only retail. Watson-like technologies and augmented reality will allow physical stores to turn the tables and magnify the digital experience by bringing the web right to where the shopper can physically touch it.

Brick-and-mortar retailers may still drive a significant majority of retail sales, but online sales are growing faster. Physical stores, once seen as a negative, will become a big positive. Their proximity to the customer will give them the advantage of integrating the immediacy of physical shopping with a magnified digital experience inside the store.”

It’s true that Watson’s offspring could drastically change a physical store’s shopping experience, but presumably any digital tool that a sales associate could use in-store could also be used by the shoppers themselves while they’re sitting on their couch. IBM says augmented reality, for example, could enhance the retail experience. Why not put that tool online and make it accessible from home? Virtual tools aren’t tied to physical locations.

For every company like IBM that offers tools to draw you back to the store, there will be a dozen online startups using the same tools (plus a few innovations of their own) to drive their own business that isn’t hampered by overhead costs like staff, rent and building insurance.

Originally appeared at marketingmag.ca

6 easy steps to emptying your business wallet

In the early 1980’s, when I began operational work with businesses, there was a conventional attitude to inventory control. This wisdom measured inventory control by looking at the relative cost of money and the interest charged against having that inventory on the shelf. That attitude saw the creation of robust ERP systems to help managers like me.

Because the recent price of money is so cheap, that business calculation has taken a knock; but the curtain is now drawn back revealing another way to measure the effectiveness of inventory control.

Consider that you have $10,000 per year with which to purchase housewares inventory. And let us suppose that 90% of that inventory sells during the year. At the end of the year 10% of the original $10,000 is still on the shelf. $1000. Theoretically, that means that in the coming year, only $9000 is available to purchase inventory. At the end of that year, assuming 90% sells, the will be $1900 worth of unsold inventory on the shelves. It does not take long to realise that all the cash will shortly be locked up in unsold inventory. The table and chart show how that works.

The result will be, of course, that the company finds itself less and less able to purchase new goods. There may not even be the room on the shelves or in the warehouse to store more purchases. From the customer point of view, the company will be stuffed with dust covered inventory. The company has ground to a halt.

If the dead inventory is converted to cash at even 20 cents on the dollar, you can use that cash to buy goods that will sell and buildup the cash available for further purchases.

Does this ever happen in real life? Yes is the simple answer. A decade ago, the company I managed had $600,000 of inventory of which 30% had no sales in 6 years. This strapped the company for cash. There were items on the shelf due to ordering errors and for which there was not even a market for more than 150 miles.

Recently, an office furniture company called me about their cash problems. They badly needed $100,000. But in their showroom and warehouse they had inventory totalling almost double that. The solution was to have a huge sale and convert everything to cash.

Remember that cash is king and being without it leaves you at the mercy of creditors, suppliers, and landlords. With cash, you have a chance. Even selling goods below cost and converting those goods to cash is better than sitting on mountains of unsold inventory. 

Written by Andrew Gregson, Senior Partner at Floodlight Business Solutions and author of Pricing Strategies for Small Business (2008).  1-888-959-0752  www.floodlight.ca. Floodlight Business Solutions, where we help you drive profits.

 

Exiting your Business with a Barrelful of Money

 

How to Super-Size the Cheque the Buyer will give you.

With the baby boomers reaching retirement age, a large number of companies will likely change hands in the coming years. Right now, 20% of small businesses are for sale. Within 10 years that percentage will double to 40% and within 15 years that number will rise again to 70%. Kelowna and the Okanagan, being an older demographic are at least 5 years ahead of that supply curve.

soldWhat will be the fate of small businesses when the owners retire?

According to TD Waterhouse’s early October Business Succession Poll of 609 small business owners, only 24 per cent of small business owners surveyed said they had a succession plan worked out for retirement.

Of those polled, whether they had a formal plan or not, 23 per cent said they would simply close their business when it came time to retire; 20 per cent planned to sell their business to a third party; 18 per cent expected to transfer it to a family member; 12 per cent said they’d sell to a partner or employee; and 27 per cent said they were not yet sure what they’d do with their business.

td waterhouse survey

 

 

 

 

And what will be the likely impact on personal wealth?

When you sell to a family member or employee, there are typically fewer dollars on the table, because the company will be heavily discounted.

Closing the doors means zero return for years of business building.

The people answering “not sure” are likely faced with a Freedom 85 Plan, wherein the owner works until he/she can no longer work- and not by choice.

Of course, if the owners salted money away and used the cash flow diligently to build personal assets, then the owners may have enough for a comfortable retirement, allowing them simply to close the doors.

This article, however, is about those who are relying on the sale of their business to fund their retirement and how to find the retirement money they need.

Simple economics dictate that in forthcoming years, supply will exceed demand and many companies will just be left on the shelf as buyers cherry pick the best. But since the beginning of the recession in 2008 many businesses have faced falling sales and increasing debt. This situation has eroded value in many businesses.

So how can an owner stand out from the rest in a crowded bidding war for a buyer? What will buyers pay top dollar for? Investors look for a return on their investment and will not buy indebted companies with falling market share and paper thin margins. Most of all, they will not buy a business that depends entirely upon the owner to make it work.

  1. Is there good return on equity – today, not some hypothetical future?
  2. Does the company have high profit margins?
  3. What fixable factors mean that the business will be purchased at a significant discount to its value?
  4. Are there systems in place for the owner not to have to work 12 hours per day?
  5. What factors will help a buyer get financing from his financial Institution?

If an owner answers NO to any of these questions, then something needs to be done, starting today.

What to do?

  1. Pay for a third party valuation and ask what factors are holding back the value.
  2. Pay down debt, starting with the most dangerous debts
  3. Build tangible assets that hold their value and are essential to the business
  4. Increase profits and cash flow with a better pricing strategy
  5. Increase sales with a modern marketing plan
  6. Create a credible exit plan that identifies to whom you will sell the company and at what price and when.
  7. Talk to a good accountant about the tax implications of your plan
  8. Build a solid 3 year plan to make this happen
  9. Work the plan
  10. Do something, do anything. Remember that even a dead fish can float downstream.

By Andrew Gregson, Senior Partner at Floodlight Business Solutions LLP, a consultancy focusing on rebuilding sales, rebuilding finances and creating value. call today if you need a guest speaker on this topic www.floodlight.ca.

Email: agregson@floodlight.ca                        Ph: 888-959-0752

Innovate, Don’t Ape – How to Survive the Recession

Aside

apeThirty years ago, according to a recent article in the Economist, the bosses of America’s car industry were shocked to discover that Japan had overtaken them to become the largest car manufacturers on the planet. The bosses blamed this success on cheap labour and government subsidies.

But the progressive bosses went to Japan and discovered that Honda and Toyota had raced ahead of them by virtue of a combination of innovation and inspiration. The American manufacturers quickly dubbed the methods of production “lean manufacturing”. This approach to manufacturing was in fact an American idea that was fully developed in Japan and ignored in America. The inspiration was to listen to customers who – echoing today’s demands- were looking for cars that were cheap on gas but still a quality product.

The moral of the story is that if Japan had merely aped American car manufacturers, their car industry would not have thrived. Today’s emerging economies are growing in part on cheap labour but mostly because they have innovated faster than rich countries. Kenya, for example, is the world leader in money-transfer by cell phone. Frugal innovation in the emerging world has created the $3000 car and the $300 laptop. These products were re-designed to eliminate costly steps in the manufacturing process.

The lesson for today’s businesses is an old one. Innovate don’t ape. If everyone else is offering sale priced goods on senior’s Tuesdays, and they are not making any money, why would you want to copy them? If everyone else offers the same burgers, the same landscaping service, the same financial solutions, the same furniture, then, to compete you must drop your prices in order to gain customers.

 In a conversation last week with a manufacturer in Vancouver, the owner told me that his approach during this recession had been a total reversal of the approach in the recession 10 years ago. A decade ago, the company chose to ride the storm and drop prices. This time they cut costs and left prices intact. The result: fewer sales but more cash in the bank.

 So, the question is how to innovate. Can you make your product or service better in some way than is currently offered? Will the change be a gimmick and easily copied by your competitors or can you offer something your competitors cannot?

 Overwhelmed by the thought of what to do? Do you think your business has no room to innovate? Consider this. Water and flour are commodities traded on the world markets on price alone. When mixed together, they ought to produce another commodity. However, this product has over 1000 market niches with prices that reflect not the cost of materials or the taste of this food product, but the shape of the food. I am speaking, of course, about pasta.

This is brilliant marketing to create a market based upon the shape of a food product while everyone else focused on flavour or fast food.

5 keys to profitability – part 1

keysA profitable business is a saleable business. A profitable business is easier to manage and to operate. Everyone loves to do business with probable businesses because they all know the invoices will get paid. The best employees want to work for profitable companies because they know their paycheques will not bounce or get delayed.

Profit is the reason entrepreneurs get into business in the first instance; but how to keep a company profitable is sometimes a trial. Here is how, with the first of our 5 keys to profitability.

Attention to cash flow

Most business owners focus on price and margins forgetting an important element in running a successful business – cash flow. What does this mean and how does it work?

Let us consider for a moment that you are selling loose tea. You pay 1 dollar per kilo for the tea. You sell the tea for $1.50 per kilo giving you a margin of 33%. Monthly you can sell 100 kilos to 100 different customers. So every time you sell one kilo of tea you profit by 50 cents.

At $1.50 per kilo you can sell 100 kilos per month but experiments have shown that by dropping the price to $1.29 per kilo you sell 150 kilos per month to 150 different customers. That generates a margin of 22%.  So every time you sell one kilo of tea you profit by 29 cents.

Most business owners will focus on sales and price believing that dropping the price will increase sales and the sun will shine. But will that reasoning help your profits?

In the first example the cash flow is $50 per month. In the second the cash flow is $43.50. So dropping the price and selling even more tea has damaged the bottom line. In terms of cash flow, increasing the sales with a lower price has not been a good decision.

But if you focus on the cash flow figure, you can also improve profits, as follows. Suppose that you are now selling tea for the sale price of $1.29 per kilo. But instead of selling one kilo at a time, now the buyer must buy a minimum  of 2 kilos. As before, 150 customers come in and buy tea and the margin remains the same at 29 cents per kilo. But this time the contribution to the bottom line is $87. And you did not have to work any harder for that profit.

What this example tells us, is to focus on the dollar contribution and not margins or even the price. Dollars pay the rent, employees and taxes.

Written by Andrew Gregson, Senior Partner at Floodlight Business Solutions and author of Pricing Strategies for Small Business (2008).  1-888-959-0752  www.floodlight.ca. Floodlight Business Solutions, where we help you drive profits.

Thinking twice about price

WHEN bosses promise to make their companies more profitable they usually say they will do so by increasing sales or cutting costs. But a third road to profits is rarely mentioned: putting prices up. Managers often fail to ask how they might do better at plucking the goose to obtain the most feathers with the least hissing. The spiel from the management consultants who advise companies on pricing—whether specialists like Simon-Kucher or giant generalists like PWC—is that it is now more vital than ever to be smart at it. In today’s austere age many businesses cannot depend on rising sales volumes to lift their profits. As for cutting costs, most have already pared them to the bone. Prices are all that is left. And a business can do a lot with clever pricing, to boost its share of the limited spending-power that is out there.

Makers of high-tech products such as smartphones can opt to add whizzy new features and push up prices. In the case of luxury goods, their exclusivity is a large part of their appeal, and this in turn is a function of their price, so firms usually have scope for limiting supply and charging more: Ferrari, a sports-car maker, and Mulberry, a purveyor of posh bags, have both recently signalled that they plan to do just that. But raising prices by making products better or more exclusive is a strategic decision, open to only a few types of business. For all sorts of mundane goods and services there is much that can be done tactically, the consultants say, to charge more for the same thing.

Second, companies need to remember that, as the late Peter Drucker, a management guru, once put it, customers do not buy products, they buy the benefits that these products and their suppliers offer to them. So, businesses that fail to identify what benefits they are offering each type of customer are likely to be undercharging some of them. Equipment-makers who sell to other businesses can be especially prone to a “cost-plus” mentality, in which they charge the same margin to everyone instead of identifying those that are less price-sensitive and finding ways to earn more from them. Oil companies, for example, can suffer huge costs in lost drilling time if a pump goes down, so pump-makers could charge them a premium for guaranteed same-day dispatch of spares.

Airlines have learned to “unbundle” their product, charging separately for baggage and meals and increasing their overall takings. But industrial suppliers may still charge the same to customers who never call their technical helpline as to those who ring it daily. Makers of everything from aircraft engines to lorry tyres have gone further in selling benefits rather than products, by offering “power by the hour” contracts in which customers only pay when they use their goods. The suppliers earn more overall, while their customers preserve scarce capital.

A third route to charging more is to manage customers’ expectations better. In the early 2000s executives at General Motors were told to wear badges with “29” on their lapels, as part of a disastrous plan to get back to a 29% market share in America. This merely reinforced car-buyers’ assumption that GM would offer them whatever discounts it took to shift its metal off the forecourts, putting the firm on the road to bankruptcy. (Last year its market share fell to 17.5%, its lowest since the 1920s.) Once customers know that a firm’s price list is a work of fiction and that it will resort to discounts as soon as sales dip, it will be a long haul to get them used to paying full price, let alone accepting increases. Simon-Kucher’s consultants praise DHL, a logistics firm, which spent years drilling into its customers that whatever the economic conditions there will be a rate rise each year.

You’ve been framed

Fourth, there are lots of simple presentational tricks that almost everyone is wise to but which still, miraculously, work. Restaurants add some overpriced wines lower down the menu to make the ones at the top seem reasonable. Makers of ice cream offer “33% extra free” rather than “25% off” the cost of the regular size, even though these are arithmetically the same thing. Buyers at big industrial firms are just as susceptible to such “framing” when reviewing a list of widget prices.

The pricing experts make it sound so easy. But there are of course limits to how far firms can go in tailoring their prices to the customer without appearing sneaky. Last year Orbitz, an online travel agency, was criticised for offering a costlier selection of hotels to people browsing its site on an Apple Mac because it assumed they were richer than PC users. Although a firm’s customers may not notice the odd price rise slipped in here and there, they will eventually notice if their overall bill starts to swell: Tesco, Britain’s biggest grocer, is now having to offer expensive discounts to win back a damaged reputation for value.

And sticking to a pricing strategy takes guts. The irony, confides a senior management consultant, is that firms like his have such a taboo against letting go of a client that they are the worst at taking their own advice to be fearless in asking for more, and walking away if they do not get it.

Economist.com/blogs/schumpeter

Business for Sale – But is there enough money to retire?

In these troublesome economic times may businesses face the twin threats of falling sales and increasing debt. Is this the time to sell your business? Today, 20% of small businesses in Canada are for sale by owner or through a broker. In 5 years accountantinescapable demographics will push that percentage to 50%. With more sellers than buyers, prices will certainly fall. Choosey buyers will pay for the best and ignore the rest.

Will there be enough money to retire comfortably?

If that answer is no, what can be done to change that?

This article is all about business succession planning and how to do it profitably.

Step 1: Improve the balance sheet. That means reducing debt or at least changing the ratio between debt and assets so that the company has more value.

Step 2: Improve sales. Sell more but  be careful of selling to poor credit risks. This increases accounts receivable, an asset until it must be collected but then becomes a bad debt. You need more sales to better quality (blue chip) customers.

Step 3: Improve profits. This can be achieved by increasing prices, reducing costs and keeping more in the company.

Sound easy doesn’t it?

Well, how easy is it to increase sales today? Can you double your sales which will therefore double profits? These are tough times and your competitors are pushing back every day.

Marketing methods are changing. Yellow pages, the workhorse of advertising for decades is in its death throes. Customers now shop on line and the younger demographic chat on social media before opening their wallets. Have you got a strong presence in that virtual world? Have you got any presence at all or have you merely got a static website that is found on page 97 of a Google search?

Can you cut costs enough to make a big difference in profitability? This will not mean counting the paperclips but real and deep cost cutting. Cutting costs in any business is important. Cutting into fat is imperative; cutting into muscle regrettable; but cutting into bone, an amputation of ability to perform.

Can you increase prices and still sell more? Your customers may associate high prices with better quality, but can you deliver a better quality product or service? And how will you measure that better service and communicate that to your customers, in 25 words or less?

How can you reduce debt when every dollar earned is spoken for? You could manage your payments better and more purposefully to reduce debts, eliminating the highest cost debt first and planning to retire all the debt within 3 years.

soldBut please ask yourself how determined you are to accomplish all that this entails. Can you do this without help? Daily business pressures make it difficult. It takes character to create and implement a 3 year plan to improve the value of a business.

Andrew Gregson is  a Senior partner with Floodlight Business Solutions where we  help our clients to re-build their business. We focus on sales and the balance sheet so that value in the company is increased, letting the owner sell or retire.

Pricing Lessons – How to Sell more Healthy Food

broccoliI am extracting the pertinent information on pricing food, from a learned article by two INSEAD  researchers called “Does food marketing need to make  us fat?” ,.

Most food is still sold as a commodity which has brought with it a steady decline over the past 50 years in the relative cost of food. We spend less on food as a proportion of our income, certainly in North America, than previously. But does price or discounting influence purchasing?

The authors pursue a number of studies on the effect of price on purchase decisions that are important for the savvy businessman.

In the long term.

The average price elasticity of food consumption is low at -.78. We need to eat to survive! But, long term low retail prices for food, especially fast food, have resulted in people consuming more, as measured in the increasing rates of obesity.

But higher prices can lead to reduced consumption.  A 10% increase in the price of fast food leads to a statistically correlative reduction in obesity of 0.7%.

Pricing is a stronger motivator in a buying decision than nutritional labelling – a strategy that sometimes backfires because nutritional labelling is often associated with no flavour or just bad taste.

“The only exception to the rule that higher prices reduce consumption comes from a study showing that higher prices at an all-you-can-eat pizza restaurant led to higher consumption of pizza, probably because of the psychology of “sunk costs,” which leads people to try to eat “their money’s worth.”

In the short term

In the short term, significant price reductions can lead to measurable increases in consumption.

“Probably the best evidence of this comes from a randomized controlled field experiment involving 1,104 shoppers. This study found that a 12.5% temporary price discount on healthier foods increased the purchase volume of these foods by 11% among the low-income consumers who received the coupons. The effect persisted even 6 months after the promotion had been stopped. “

This is important because low income shoppers mind their pennies and are motivated to buy as many calories per dollar as they can.

Interestingly, “price deals can influence the speed of consumption even when the food has already been purchased. This should not, in theory, influence consumption because the cost cannot be recovered, no matter when, or how quickly, the food is consumed. Nevertheless, studies have found that people accelerate the consumption of products perceived to have been purchased at a lower price.”

Observation – quantity discounts lead to stockpiling which accelerates consumption. The quantity purchase of some foods displaces the purchase of other foods. Because it occupies shelf space, we eat more of it. This effect also persists even 6 months after the initial discount.

Recommendation – offer “buy 1 get 1 free”

*** However, the discounts on healthy food did not reduce purchases of “vice” or unhealthy food.

So, if you want people to buy healthy foods, do not discount unhealthy foods.

Observation – consumers prefer price discounts to bonus pack on “vice” foods, but prefer bonus packs to price discounts on healthy food.

Recommendation – offer “free quantity” promotions. That means Larger Package size on healthy foods like fruit and vegetables.

The points that are important to food retailers in order to increase sales and profits are:

  1. Keep the packaging of “vice” foods to smallest sizes and lower the price.
  2. Package healthy foods in larger quantities and keep the prices higher.

 

(Nutritional Reviews. 2012 October; 70(10): 571–593.  Published online 2012 October 4. doi:  10.1111/j.1753-4887.2012.00518.x PMCID: PMC3495296 Does food marketing need to make us fat? A review and solutions Pierre Chandon and Brian Wansink)