4 Keys to Increased Profits & Cash Flow

Every business I speak with wants to increase sales in their business.  Who wouldn’t?  

But increased sales is not necessary for the goal.  We don’t really want more sales, what we really want is more profit, right?  Well not necessarily, because you can’t really do anything with profit.  Profit is just a theory.  The question is how we turn profits into cash. 

To help us understand how to increase our profits and cash flow we must first understand the 4 M’s; Management, Money, Marketing, & Merchandise.

Management:  Properly run companies can sustain profitability over the long run because they are organized and cut wasteful spending.  When business is good the average company doesn’t seem to care where the wastes are in the business because there is enough cash to cover up the waste.  Properly run companies understand that investing in properly trained teams will lead to increased profits and cash flow.  A team who is aligned to company goals and that understands how their specific role and task leads into the company’s “big picture”, will be more effective and efficient.  Since they are aligned to the company’s goals they will be able to recommend ways for the company to be more effective and efficient.

Money:  Money management is a key to all successful business.  That’s both money coming in and out.  The two biggest bottlenecks that prevent profits from turning into cash are inventory and accounts receivables.  Properly run companies are always managing their vendors, looking for better ways to order more efficiently and ways they can negotiate better terms.  Most AR problems arise because issues aren’t addressed until they turn into problems.  Make sure your clients understand and are clear on your payment terms.  Don’t be afraid to ask for your money.  If you don’t, someone will be getting paid before you. 

Marketing:  Even in a tough economy people are spending money on your product or service.  The purpose of your marketing is to help you get your “unfair” share of the dollars being spent.  To do this you have to be very clear on what your clients want and how your product or service can help them achieve that.  Marketing is not just advertising, it’s all about understanding your whole sales process, which turns a lead into a customer that comes back again and again.  By understanding each step of the sales process from lead generation to repeat customer, you can quickly identify the bottlenecks and implement strategies to move them to the next step.

Merchandise:  If sales are down, you need to see if people are using your product in the same way as before.  In the past, people might have been using your product or service out of ego, price, or having a particular item, that might not be the case now.  Maybe now your product or service could be used in a different way that your customer hasn’t even thought of.   Successful companies are always asking themselves why people are buying their product or service.  Additionally, make sure your team understands which products are your most profitable.  Just adding some extra attention to your most profitable items can easily increase your overall profit margins.

In creating a more valuable business, it is always the little things that get the big results. Our Business Health Check will give you invaluable insights into the many areas of your business that if tweaked will increase the value of your business.

By completing the Business Health Check, you will receive a Free Report based on your answers, prepared by our team of highly skilled Business Coaches.  CLICK HERE to take your Business Health Check Now

Actions that Lead to Profits

The goal of every business is to make money or a profit.  For some reason profits seem to elude some businesses more than others.  They are working hard day in and day out, but they seem to just be spinning their wheels and not getting anywhere.  They are trapped in the American dream treadmill, moving faster and faster but going nowhere.

The reason they are working so hard and not seeing any fruits from their labor is that their actions are in the areas that do not lead to the profitability of the business.  We are busy, but we are spending our time with non-productive activities.

So what is a productive activity?  The definition is very simple.  An action that moves us toward making money is productive and an action that leads away from making money is non-productive.

In business we have to realize that “people working” and “making money” are now the same thing.  Once we understand this, we can now look at our business from a different perspective.  We now need to look at our profitability per activity.  So now we can start looking at a different set of metrics to measure how profitable a particular job or activity is in our business.

The financial measurements we now have to look at to see if we are making money are:

[1] Net Profit    [2] ROI – Return on Investment    [3] Cash Flow.

We need to determine our Profit KPI’s (key performance indicators) by determining profit per....

• Direct labor hour
• Team member
• Transaction or Job
• Customer
• Product or Service

The first area you should look at is gross profit per labor hour.  This will help you to determine what types of jobs you should focus on to increase your overall profits.  Let’s take a look at this example...

	Job A	Job B
Revenue	$3,900	$9,000
Material Costs	$2,250	$3,000
Labor Costs	$450	$2,500
Direct COGS	$2,700	$5,500
Gross Profits	$1,200	$3,500
Gross Profit Margins	30.8%	38.9%
# of Labor Hours	18	100
Gross Profit per Labor Hr.	$67.00	$35.00
Determine Labor Hr per month 10 Techs @40 hrs  (@90% compactly * 4.3 wks) 36 hrs per tech	1560/hrs	1560/hrs
Gross Profit per Month	$104,520	$54,640

In this example we are comparing 2 different types of jobs.  At first glance, Job B has a higher gross profit margin and seems to be more profitable.   However, when you further analyze the gross profit per labor hour, doing more of Job A type jobs can double the profitability of your business.

By understanding this, we can now direct our marketing to target more “A” type jobs.   Or, we can look at how we can be more efficient with Job B type jobs to reduce our labor hours per job.  Once we implement these 2 basic strategies we can begin to learn how to work smarter and not harder in our business.

Will your business be more valuable this time next year?

For many, January is a time of rebirth and resolutions. It’s a month to reflect on last year’s achievements and to set goals for the year ahead.

Some people will set personal goals like losing weight or quitting a nasty habit, and most company owners will set business goals that focus on hitting certain revenue or profit milestones.

But if your goal is to own a more valuable business in 2014, you may want to make one of the following New Year’s resolutions:

• Take a two-week vacation without checking in with the office. When you return, you’ll see how well your company performed and where you need to make a key hire or create a new system.
• Write down at least one process per month. You know you need to document your systems, but you may be overwhelmed by the task of taking what’s inside your head and putting it down in writing for others to follow. Resolve to document one system a month and by the end of the year you’ll own a more sellable company.
• Offload at least one customer relationship. If you’re like most business owners, you’re still your company’s best salesperson, but this can be a liability in the eyes of an acquirer, which is why you should wean your customers off relying on you as their point person. By the time you sell, none of your key customers should think of you as their relationship manager.

• Cultivate a new relationship with a new supplier. Having a “go to” group of suppliers is great, but an over-reliance on one or two suppliers can create a liability for your business. By spreading some of your business to other suppliers, you keep your best suppliers hungry and you can make a case to an acquirer that you have other sources of supply for your critical inputs.
• Create a recurring revenue stream. Valuable companies can look into the future and see where their revenue is going to come from. Recurring revenue models can vary from charging customers a small amount for a special level of service to offering a warranty or service contract.
• Find your lease (and any other key contracts). When it comes time to sell your company, a buyer will want to see your lease and understand your obligations to your landlord. Having your lease handy can save time and avoid any nasty surprises at the eleventh hour in the process of selling your company.
• Check your contracts and make sure they would survive the change of ownership of your company. If not, talk to your lawyer about adding a line to your agreements that states the obligations of the contract “surviving” in the event of a change of ownership of your company.
• Start tracking your Net Promoter Score (NPS). The NPS methodology is the best predictor that your customers will re-purchase from you and/or refer you, which are two key indicators of a healthy and successful company. It’s also why many strategic acquirers and private equity companies use NPS as a way to measure the health of their acquisition targets during due diligence.
• Get your Sellability Score. All goals start with a benchmark of where you’re at today, and by understanding your company’s Sellability Score, you can pinpoint how you’re doing now and which areas of your business are dragging down your company’s value. 

A lot of company owners will set New Year’s resolutions around their revenue or profits for the year ahead, but those goals are blunt instruments. Instead of just building a bigger company, also consider making this the year you build a more valuable one.

Growth vs. Value: Not all Revenue is Created Equally

When you look ahead to next year, will your growth come from increasing your average dollar sale and average number of transactions per customer, (selling more to your existing customers at a higher rate) or finding new customers for your existing products and services through lead generation?

The answer may have a profound impact on the value of your business.

Take a look at the research coming from a recent analysis of owners who completed their Sellability Score questionnaire. We looked at 5,364 businesses and found that the average company that had received an offer from an acquirer was offered 3.5 times their pre-tax profit.  When we isolated just the businesses that had a historical growth rate of 20 percent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 percent more than their slower growth counterparts.

However, the real bump in multiple came when we isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 percent more than the average companies, and fully 20 percent more than the fastest growth companies.

Nurture your Niche

Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, they are buying something they cannot easily replicate on their own.

A large company will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.

Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.

Focusing on your niche is one of many areas where the long-term value of your business is at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the value of the business.  

At ActionCOACH our definition of a successful business is a commercial profitable enterprise that can work without the business owner.  Our 6 Steps process helps business owners by coaching them to define their niche and at the same time focus on the 5 drivers of profitability to increase cash flow.  We then help you to leverage your business by creating systems and helping you to find and keep motivated team members to "work in" your business.  This will give you the time and cash flow to plan and "work on" your future growth and eventual exit from the business.

You can get your own Sellability Score, and see how you compare on the eight key drivers of valuability and thus sellability, by taking our 13-minute survey here at www.actioncooachsellabilityscore.com

The Hidden Goal of the Smartest Business Owners

What were your business goals for the year? If you’re like most successful owners, you have a profit goal you want to hit. You may also have a top line revenue number that’s important to you. 

While those goals are important, there is another objective that may have an even bigger payoff: creating a commercial profitable enterprise that works without you.  In doing so, you are also building a sellable business.

But what if you don’t want to sell? That’s irrelevant. Here are five reasons why building a sellable business should be your most important goal, regardless of when you plan to push the eject button:

1. Sellability means freedom

One of the fundamental tenants of sellability is how well your company would perform if you were unable to work for a while. As long as your business is dependent on you personally, there’s not much to sell. Making your company less dependent on you by building a management team and creating just-add-water systems for employees to follow means you have the ability to spend time away from your business. Think of the world of possibilities that would open up if you could choose not to go into the office tomorrow….

2. Sellable businesses are more fun

Running a business would be fun if you were able to spend your days on strategic thinking and big picture ideas. Instead, most business owners spend the majority of their day on the minutia: the government forms, the employee performance reviews, bank reconciliations, customer issues, auditing expenses. The boring details of company ownership suck the enjoyment out of owning a business—and it is exactly these tasks you need to get into someone else’s job description if you’re ever going to sell.

3. Sellability is financial freedom

Each month you open your brokerage statement to see how your portfolio is doing. Not because you want to sell your portfolio, but because you want to know where you stand on the journey to financial freedom. Creating a sellable business also allows you peace of mind, knowing that you’re building something that—just like your stock portfolio—has value you could choose to make liquid one day.

4. Sellability is a gift

Imagine that your first-born graduates from college and as a gift you give him your prized 1967 Shelby Ford Mustang. Your heavily indebted child takes it on the road, but after a few miles, the engine starts smoking. The mechanic takes one look under the hood and declares that the engine needs a rebuild.

You thought you were giving your child an incredible asset, but instead it’s an expensive liability he can’t afford to keep, and nor can he sell it without feeling guilty.

You may be planning to pass your business on to your kids or let your young managers buy into your company over time. These are both admirable exit options, but if your business is too dependent on you, and it hasn’t been tuned up to run without you, you may be passing along a jalopy.

5. Nine women can’t make a baby in one month

There are some things in life that take time, no matter how much you want to rush them. Making your business sellable often requires significant changes; and a prospective buyer is going to want to see how your business has performed for the three years after you have made the changes required to make your business sellable. Therefore, if you want to sell in five years, you need to start making your business sellable now so the changes have time to gestate.

Are you curious about how sellable your company is and what you would need to tweak to sell it when you’re ready? Then it’s time to get your Sellability Score via the questionnaire on our website. It takes about thirteen minutes and your responses are kept confidential. You can complete the questionnaire here www.actioncoachsellabilityscore.com.

How to Identify Profitable Jobs

The goal of every business is to make money or a profit.  For some reason profits seem to elude some businesses more than others.  

They are working hard day in and day out, but they seem to just be spinning their wheels and not getting anywhere.  They are trapped in the American dream treadmill, moving faster and faster but going nowhere.

The reason they are working so hard and not seeing any fruits from their labor is that their actions are in the areas that do not lead to the profitability of the business.  We are busy, but we are spending our time with non-productive activities.

So what is a productive activity?  The definition is very simple.  

An action that moves us toward making money is productive and an action that leads away from making money is non-productive.

In business we have to realize that “people working” and “making money” are now the same thing.  Once we understand this, we can now look at our business from a different perspective.  We now need to look at our profitability per activity.  So now we can start looking at a different set of metrics to measure how profitable a particular job or activity is in our business.

The financial measurements we now have to look at to see if we are making money are:

[1] Net Profit    [2] ROI – Return on Investment    [3] Cash Flow.

We need to determine our Profit KPI’s (key performance indicators) by determining profit per....

• Direct labor hour
• Team member
• Transaction or Job
• Customer
• Product or Service

The first area you should look at is gross profit per labor hour.  This will help you to determine what types of jobs you should focus on to increase your overall profits.  Let’s take a look at this example...

	Job A	Job B
Revenue	$3,900	$9,000
Material Costs	$2,250	$3,000
Labor Costs	$450	$2,500
Direct COGS	$2,700	$5,500
Gross Profits	$1,200	$3,500
Gross Profit Margins	30.8%	38.9%
# of Labor Hours	18	100
Gross Profit per Labor Hr.	$67.00	$35.00
Determine Labor Hr per month 10 Techs @40 hrs  (@90% compactly * 4.3 wks) 36 hrs per tech	1560/hrs	1560/hrs
Gross Profit per Month	$104,520	$54,640

In this example we are comparing 2 different types of jobs.  At first glance, Job B has a higher gross profit margin and seems to be more profitable.   However, when you further analyze the gross profit per labor hour, doing more of Job A type jobs can double the profitability of your business.

By understanding this, we can now direct our marketing to target more “A” type jobs.   Or, we can look at how we can be more efficient with Job B type jobs to reduce our labor hours per job.  Once we implement these 2 basic strategies we can begin to learn how to work smarter and not harder in our business.

Looking for more ideas to increase the value in your business to make it sellable one day?  

Take this quick 15 questionnaire to learn how valuable your business in right now and the 8 areas to work on to begin increase its value today! Go to...  www.actioncoachsellabilityscore.com