Some useful
articles.
Would you employ an un-trained
Plumber?
So why have an
untrained CEO?
Many entrepreneurs
are trades people who decided they could do a better job at running a company
than their then boss and break out to do their own thing. Being trades people
they know the importance of training, and yet they plunge in willy- nilly to
being the CEO with no thought that maybe they should invest in specific CEO
training.
There is no doubt
that being a small business CEO requires a special set of skills. Questions
like, "How do I price my product?" or "What information do I need from my
accounting system to know my business is healthy?" are not covered in trade
school, and if not correctly answered will result in business failure. The
budding entrepreneur will invest $50,000 in a truck, but cannot see the
importance of an investment in the training he need to ensure he can pay for it.
Too many small
businesses fail in their early years and a high proportion of those that don't
never reach their true potential. Investing in management training for the CEO
and other senior managers will have a dramatic impact on the success ration of
these enterprises.
What is Break-Even
This article explains how to calculate the Break-Even point any business.
The Break-even point is defined as the point where total gross revenue from
sales equals total fixed expenses plus total variable expenses.
Definitions
Fixed expenses
are constant regardless of the amount of business transacted. If no business
transactions occurred, these expenses would still remain a fixed amount. One
example is rent, another is depreciation.
Variable expenses, as the name implies, vary with the volume of business
done and disappear completely when there are no sales. An example of such
expense items would be material costs, direct workers pay, sales commissions,
etc.
The formula for calculating the Break-even point is:
Fixed Costs or Overhead
--------------------
GP %
You Only Get One Chance to Create a
First Impression
Why do some salespeople make it look so easy? Most likely their secret is that
they have developed an effective sales message. Before starting to make
customer sales calls you need to develop a strong sales message that clearly
conveys to the customer what products and services you and your company are
selling.When you get the opportunity to present your message to the
decision maker in your customer company, you really have a very short time to
win him over. Win his attention in the first five minutes and you will have as
long as you need to make the sale. Lose him in that same five minutes and no
matter how long you succeed in sitting in his office, you will never get the
order.
So what is the message? Make sure you define yourself and your products
from the customer's point of view. Customers don't buy things, they buy
results. You need to answer the following questions:
- What will my product or service do for those who buy it?
- What specific need will it fill?
- What service does it render?
- How will it make the customer's life easier?
As you answer these questions you define what your core selling message is.
Get it down to just a few sentences. Be as succinct as possible. Practice it
until you can deliver it flawlessly. In order to develop a great sales message
you have to understand what you are truly selling. Remember your product or
service is just a means to an end in the eyes of the customer. You have to
address the customers "end" in order to get the order.
If you develop your message to answer these questions in the first five
minutes of your presentation, you will create the first impression that you
and your product are worth your customers attention, and your meeting will be
a much more productive conversation.
Your AR is Your Cash in Someone
Else's Bank Account
As a management consultant I see many different businesses
but in most cases the problems are the same. In the over 50 clients I worked
with over the past three years, not one did not have a problem with accounts
receivable (AR). (Receivables are those invoices for work or services you have
performed or delivered, but have not yet been paid.) The common response to the
question was "They are such a good customer, we don't want to upset them."
My response to that is "Why should it upset them if you ask for your money". But
be that as it may, the real issue is that getting paid is part of the job. It is
part of customer service and if it is viewed that way it is so much easier. The
key therefore is not to wait till an invoice is past due, by then it is getting
too late. Before due date make a customer service call and ensure there are no
problems.
If you do that, when the invoice becomes due, there are no excuses for it not to
be paid.
One thing that may change business owner's attitude would be if accountants
change the way they deal with bad receivables. Most often it is deducted from
the top line - sales, giving the impression it is just another sale not done. It
would be better if it went right down to the bottom line and be deducted from
profit. The result is the same, but it reinforces the truth that a bad debt
comes right out of the owners back pocket.
Operating an effective AR program will reduce your loss from bad receivables,
but sometimes you get the people who appear to have the money but just won't
pay. Once you have tried everything else and failed, you can get a small
satisfaction. The Internal Revenue Service consider discharged debt as taxable
income to the individual who gains economic benefit from it.
So what you do is inform the debtor that the money they owe will be reported to
the IRS in the form of a 1099-Misc. and it will be their responsibility to pay
the appropriate taxes. Often this brings a speedy response.
Some General Rules to Help You Sell
in the Post Recession Economy
The 90's and early 2000's were a time of great expansion
and sales growth was expected and assumed. However, as we come out of this
recession, this kind of sales growth cannot continue to be expected. With the
future not being as rosy and with more uncertainty, the sales effort has to
become more focused and the company has to spend a lot more time and effort on
selling.
The first step is to watch your current customers closely. So long as the
company has been doing a reasonable job, your current customers are your best
resource. What would happen if you lost your top two customers? With the 80:20
rule, we know that the top 20% of customers make up 80% of sales, and with many
companies, the top two customers are as much as 50%. Their loss will be
devastating. So what are you doing to make sure your competitors do not steal
your top customers?
If the only thing you have to keep a customer is the lowest price, there is
always someone who will beat your price. What have you done (or are you doing)
to insure the customer won't bolt when someone quotes the work at $1 cheaper?
You have to have more of a relationship with your customers than just price.
Make sure everything in your products and services is the best you can make it
and if it's not, get it fixed. Compare everything the customer sees about your
company to the competition. If it's not perfect, or as good as you can make it,
fix it.
Yes, what we are talking about is customer service. Your customer is going to
pay you good money, and you already know you have to give him good product, but
what makes the difference, and will bring him back next time, is good customer
service.
Sales cost is a major factor in all businesses, and the customer you don't have
to go out and get is the best. Look after your current customers, and they will
come back and look after you.
Mark-up or Margin, what is
the difference.
Almost every contractor I worked
with over the last few years, and there have been many, used a mark-up formula
in their pricing. In most cases it was something like $55 per hour for labor,
plus materials marked up 25%. (We will talk about the labor charge later because
it is more complicated)
“I need 25% margin to be profitable”
they say. “So why don’t you price to achieve that margin?” I ask. “Your 25%
mark-up is actually a 20% margin!” It usually takes half an hour plus a
calculator and several scraps of paper before they agree that they are pricing
their product/service 5% lower than they intended.
You can try it yourself, remembering
that the formula for margin is:
Gross Margin % = (Selling Price
– Cost)/Selling Price all *100.
but to save a little time, here
is a table:
Mark-up %
Mark-up Factor Margin %
10.00% 1.10 9.09%
15.00% 1.15 13.04%
20.00% 1.20 16.66%
25.00% 1.25 20.00%
33.33%
1.33 25.00%
40.00% 1.40 28.57%
50.00% 1.50 33.33%
As you can see, the margin mark-up
disparity increases as the mark-up increases. So remember, to get your 25%
margin, you need to mark-up by 33.33%. By doing that you increase you profit by
5%.
OK, so what is the point? The point
is that the difference can turn a profit into a loss. Let us assume your
overheads are running at 25% of sales. If you want to make a profit of 5% on
sales you must have a margin of 30%. That is a mathematical requirement. If you
interpret this to mean a markup of 30% your margin is only 23%, so instead of
making 5% profit you are losing 2%.
When you read this it all seems so obvious, but think seriously about the
implications. In the example used above, the difference between using a margin
of 30% and a mark-up of 30% is 7%, and that 7% is out of your pocket. The
numbers I use in the example are taken from an actual client. He worked his
heart out for years, keeping his head above water by taking a low salary and
working long hours (Sound familiar!). A little training in the management skills
required to be a small business CEO gave him his life back.
In a later article we will talk about the labor element, but suffice to say
here, that is one of the most incorrectly calculated elements of pricing by a
majority of contractors.
|
