This conversation follows on from "My Business Is Losing Money" and looks at the issues when the caller had done some analysis to determine if their cash crunch was due to profit or cash issues.
Caller "Paul, thanks for the advice the other day on how I can understand more about why business is losing money.
I have done the analysis and found that the big increase in my overdraft is due to a number of causes.
My customers do owe me more money and I have a couple that looks as if they are bad debts.
I have also taken more out of my business than I usually do because we had a few things done at home.
But you are also right about stretching our payments to suppliers so I am pretty sure that my business is losing money because it is making a loss".
Me "Thanks for doing the exercise. Facts are so important to understanding how to diagnose and correct business problems connected with losing money. It is a good idea to get your accountants in to confirm the diagnosis and to prepare interim management accounts but it will cost money."
Caller "I have been reading your article "How to increase profits" which has got me thinking about the different ways to make more money but I don't see many quick ways to turn things around. Everything I think of that can help seems to have a downside."
"There is no magic bullet. If business was that easy, everyone would be making big profits but many operate at close to subsistence and would lose money if the owners took a realistic salary. I am pleased that you are starting to see the financial consequences of your decisions. What things did you have in mind?"
"I know that I have to get more customers and to get the existing customers to buy more but I also know that I have to reduce my costs. I was thinking about my sales force. I have a couple of sales people at the moment, neither doing much business. One idea was to recruit someone who could do the job properly but I don't know whether that should be on top of the two I've got, one in one out which will increase my costs or both out."
"I've seen troubled companies go both ways. Reduce their sales force and save the costs of salaries, benefits, cars and expenses or to recruit extra sales people who they hope have the right skills.
You need to cost out the options and the likely results to see the profit impact.
First, try to find out why the existing sales people are not producing the goods.
Are their skills weak? If so, would they benefit from sales training and coaching?
Is it that they don't put in the effort? That places huge question marks over them but perhaps you need to find better ways to help them motivate themselves. If you don't have a sales bonus, you need one and if possible based on margins so they don't get rewarded for cutting prices.
Is the product a difficult sell? A common sales excuse is that the price is too high but that may be true if your competitor has a much better product for a similar price.
How quickly do enquiries turn into orders and cash for your business? How long does it take to build a relationship with a customer? Remember if you take on a new sales person, their costs start immediately, the income may be months away.
What else were you thinking about?
"You already touched on it. I am not sure whether I am pricing right. Should I increase my prices or reduce them?"
"I see pricing as the number 1 lever for profit so I am glad that you are thinking like this. Price too high and you are restricting sales, price too low and you are leaving a lot of money on the table.
This is a huge topic but you need to look at what has been happening with your prices. Are they being forced down by genuine competitive pressure or are your sales people using price flexibility as an easier way to make the sale than justifying value?
How do your prices compare to competitors? Do your products provide good value for money?
What happened before when you reduced or increased your prices?
Do price changes affect the size of the overall market or just transfer business from one competitor to another?""I don't know."
"OK you have some work to do there before you can even think about working out whether you will gain more from increasing or reducing prices. My general view is that reducing prices on existing business means that you have to sell much more if you are going to make money but it can help bring in extra incremental business and convert non-buyers into buyers.
What else are you thinking about?""I don't know whether I should be increasing my advertising or reducing it?"
"It depends on whether your advertising is effective. This comes back to the issue of being disciplined about measuring performance. Any adverts that don't generate the right kind of leads which can be converted into profitable business should either be stopped (to save money) or improved. It would be crazy to stop a marketing method which works.
The only proviso in your situation is that you can't afford to invest in building long term relationships at the moment. For financially secure businesses, I would be saying that you can afford to lose money on the first transaction if you will make much more over the customer lifetime.
You can't afford to do that.
"I know I need to reduce my overheads but I'm doing as many transactions as I did before so I'm thinking that cutting back on customer service and accounts staff will just get me into even more trouble."
"A very good point. Some people like to cut all costs by 10% or 15% but I believe that you need to take a more strategic view and see the big picture. It doesn't make sense to save money and make it more difficult for customers to buy. Nor does it make sense to cut back on accounts staff when you need to be increasing the effectiveness of your credit control and, because of your financial position, you need more information about your business, not less.
Look at your costs. Can you find the easy pickings. Things that you buy but don't get value?
Can you put the squeeze on your suppliers?
What areas don't make a valuable contribution? Are there any where the demand for the services has gone down?"
"This all sounds very tough."
"It is. Much easier to stop a business getting into trouble than to turn it around when it is losing money.
While it may not be as glamorous as sales and marketing, this is why I think it is so important to have a good understanding of your finances from the very start and performance measures in place.
Seeing the results of your decisions allows you to build a better mental model of your business and means that your business intuition is much better shaped.
As you have a reasonable sized business, I recommend that you find yourself a part time finance director who will get your finances into shape, explain why you are losing money and help you to plan and implement a way out of your financial difficulties. You need someone experienced and very financially aware who will stand in the trenches with you and fight.
If you had called me some months ago, I would have suggested my business coaching for you and it may be relevant for you in future to build your business skills but at the moment, you have to focus on gaining financial control of your business.
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