Running your business to make money

2008-09-29 00:00

A very good friend of mine in the UK contacted me this week, saying that a mutual friend, who has run a very successful wholesaling business for many years, is in dire straits and asked whether I would contact him.

I telephoned my friend and had long discussions with him about his business. First and foremost, “John” believes he is in no way responsible for his business’s downturn and that all his problems come from Chinese imports and a bank manager who has no sympathy whatsoever for one of his best clients.

As I listened, I felt like saying, “This is where your problem begins — you think everyone else is to blame or is responsible for your problems, not you. You have not responded effectively to new competition, whether it is from the next town or 7 000 km away. Equally, you are only annoyed with your bank manager because he won’t give you any more money. To be honest, John, I wouldn’t either!”

Now, obviously this isn’t what I said — well, not in so many words. I more tactfully suggested that he had become too close to the situation, the “wood for the trees” syndrome, and that together we should develop a new business strategy. He agreed and, I felt, even seemed happy to have a glimmer of a light at the end of the tunnel.

My recommendation was that the strategy should begin with an objective of making lower levels of turnover produce acceptable profit for his business. Again, John seemed excited at the thought of this. However, his enthusiasm waned a bit when I said this would mean cutting the operating fixed costs and increasing the prices. I don’t think he choked on my recommendation to cut overheads, it was my mentioning the price increase that seemed to cause his inability to breathe! “You sound worse than my bank manager!”

What John failed to appreciate is that businesses and markets are constantly changing. Product development and competitor initiatives can have massive impact on your business. If you choose to ignore all that is happening around you, the most likely outcome will be that you go out of business.

The essence of the problems John faced is that he had attacked the Chinese competition on price. The effect of this tactic was to produce considerable turnover growth corresponding with his reduced gross margin percentage. This concurrently with world fuel price hikes increases his distribution cost of sales and further eroding his gross margin, both value and percentage. The fact that his business was growing at the turnover line meant John’s business would naturally require more working capital to fund increased stocks and debtors and so on. When John visited his bank manager requesting the overdraft level be increased by some £100 000, he could not believe such a reasonable request would be refused.

“My turnover is going up and up, Frank. He can see my business is doing well.”

In truth, John’s business is not doing well. He has growth in turnover, but he isn’t producing profit. The bank manager said no because John’s business was at a risk of not being able to pay increased interest levels, let alone repay capital, with the business strategy that he had adopted.

John has to make lower levels of turnover profitable to the required level. How does he do this? By positioning his total marketing initiative on product range, service, quality and responsiveness.

Put another way, understanding the true needs of the customer and marketing into those.

Vitally important to this is that he increases his prices to bring down his breakeven level and set the business on course for profitability.

The last piece of the jigsaw is to remove any cost not adding value to his products or service, while remembering that lower levels of turnover should always result in lower levels of cost.

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